-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CfaLcMdWLY9rbKmQ1dgG8AO3Bm/kBO8LRhdF2ivkKkUC6koulQ6sPKIGi0dgac1D H3UfGiIoBbw4HF7UdzBIaQ== 0000950109-96-002826.txt : 19960510 0000950109-96-002826.hdr.sgml : 19960510 ACCESSION NUMBER: 0000950109-96-002826 CONFORMED SUBMISSION TYPE: 424B1 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960509 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INTERMEDIA COMMUNICATIONS OF FLORIDA INC CENTRAL INDEX KEY: 0000885067 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 592913586 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B1 SEC ACT: 1933 Act SEC FILE NUMBER: 033-34738 FILM NUMBER: 96558500 BUSINESS ADDRESS: STREET 1: 3625 QUEEN PALM DR STREET 2: STE 720 CITY: TAMPA STATE: FL ZIP: 33619 BUSINESS PHONE: 8136210011 424B1 1 424B1 Filed Pursuant to Rule 424 (b) (i) Registration No. 33-34738 PROSPECTUS [LOGO OF 4,496,689 SHARES INTERMEDIA INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. COMMUNICATIONS COMMON STOCK APPEARS HERE] Of the 4,496,689 shares (the "Shares") of common stock, par value $.01 per share (the "Common Stock") of Intermedia Communications of Florida, Inc. (the "Company") offered hereby (the "Offering"), 4,000,000 Shares are being offered by the Company and 496,689 Shares are being offered by certain stockholders of the Company (the "Selling Stockholders"). See "The Selling Stockholders." The Company will not receive any proceeds from the sale of Shares by the Selling Stockholders. The Company is concurrently offering (the "Concurrent Offering") $330.0 million principal amount at maturity of 12 1/2% Senior Discount Notes due 2006 (the "Senior Discount Notes") generating gross proceeds of $179.9 million. This Offering is not contingent upon the consummation of the Concurrent Offering. On May 8, 1996, the closing price for the Common Stock as quoted on the Nasdaq National Market, under the symbol "ICIX", was $26.063 per share. ---------------- SEE "RISK FACTORS" ON PAGE 13 FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE SHARES. ---------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO THE THE PUBLIC DISCOUNT(1) THE COMPANY(2) SELLING STOCKHOLDERS - ------------------------------------------------------------------------------- Per Share....... $26.00 $1.43 $24.57 $24.57 - ------------------------------------------------------------------------------- Total(3)......... $116,913,914 $6,430,265 $98,280,000 $12,203,649
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) The Company and the Selling Stockholders have agreed to indemnify the Underwriters (as defined herein) against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting offering expenses payable by the Company estimated at $170,000. (3) The Company has granted the Underwriters an option exercisable within 30 days to purchase up to an aggregate of 674,503 additional shares of Common Stock at the public offering price per share, less the Underwriting Discount, solely to cover over-allotments, if any. If such option is exercised in full, the total Price to the Public, Underwriting Discount and Proceeds to the Company will be $134,450,992, $7,394,805 and $114,682,539, respectively. See "Underwriting." ---------------- The Shares are being offered by the several Underwriters, subject to prior sale, when, as and if issued to and accepted by them, subject to approval of certain legal matters by counsel for the Underwriters and certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of the Shares will be made against payment therefor in New York, New York on or about May 14, 1996. BEAR, STEARNS & CO. INC. MERRILL LYNCH & CO. MORGAN STANLEY & CO. INCORPORATED The date of this Prospectus is May 8, 1996. [INTERMEDIA ENHANCED NETWORK DIAGRAM] 2 IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. IN CONNECTION WITH THE OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10b-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING." 3 AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith, files reports, proxy and information statements and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy and information statements and other information can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, its Midwest Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and its Northeast Regional Office, 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Common Stock is listed on the Nasdaq National Market under the symbol "ICIX". Reports, proxy and information statements and other information concerning the Company can also be inspected at the Nasdaq National Market at 1735 17 Street, N.W., Washington, D.C. 20006. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete, and reference is made to the copy of such contract or other document filed as an exhibit hereto or as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995, which is incorporated herein by reference, each such statement being qualified in all respects by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents or information have been filed by the Company with the Commission and are incorporated herein by reference: The Company's Annual Report on Form 10-K for the year ended December 31, 1995. The Company's Current Report on Form 8-K filed with the Commission on February 21, 1996. The Company's Current Report on Form 8-K filed with the Commission on March 13, 1996. The Company's Current Report on Form 8-K filed with the Commission on April 30, 1996 including the exhibits thereto. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996. The description of capital stock contained in the Company's registration statements on Form 8-A under the Exchange Act, filed April 7, 1992, April 28, 1992 and April 30, 1992 (File No. 0-20135). All documents subsequently filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering covered by this Prospectus will be deemed incorporated by reference into this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. THE COMPANY HEREBY UNDERTAKES TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON TO INTERMEDIA COMMUNICATIONS OF FLORIDA, INC., 3625 QUEEN PALM DRIVE, TAMPA, FLORIDA 33619 (TELEPHONE 813-621-0011), ATTENTION: INVESTOR RELATIONS, A COPY OF ANY OR ALL OF THE DOCUMENTS REFERRED TO ABOVE (OTHER THAN EXHIBITS TO SUCH DOCUMENTS) WHICH HAVE BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS. 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information including the Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. References in this Prospectus to the "Company" or "ICI" means Intermedia Communications of Florida, Inc. together with its subsidiaries, except where the context otherwise requires. Certain terms used herein are defined in the Glossary attached hereto as Appendix A. THE COMPANY ICI is a rapidly growing provider of integrated telecommunication services. Founded in 1987 as one of the nation's first facilities-based competitive access providers ("CAPs"), the Company currently operates digital, fiber optic networks in nine metropolitan areas and has one network under development. Expanding beyond provision of traditional CAP services, the Company now provides enhanced network services, including frame relay and Internet access services, primarily to business and government customers, in approximately 600 cities nationwide, and is a facilities-based interexchange carrier providing services, to approximately 10,000 customers. ICI intends to begin providing a range of local exchange services in Florida in the second half of 1996 and in other parts of its service territory as requisite approvals are obtained. ICI has continued to increase its customer base and network density in the Southeast and its customers' traffic to locations outside its existing service territory continues to increase. The Company has pursued (and will continue to pursue) attractive opportunities to expand into other geographic markets. The Company's goal is to become the single source provider of comprehensive telecommunications services to its customers. To accomplish this goal, the Company's strategy is to systematically secure a growing portion of a customer's telecommunications business and, over time, through the provision of additional integrated services, increase the customer's reliance on, and sense of partnership with, the Company. In addition, with the advent of state and federal laws mandating local exchange competition, significant opportunities exist for the Company to increase its market share and reach new market segments by allowing other parties, including interexchange carriers ("IXCs"), to resell its ICI's local exchange services, when available. ICI's strategy is designed to build a base of recurring revenues and to take advantage of the increasing requirements of business and government customers for more effective and efficient solutions to their telecommunications needs. These customers require maximum reliability, high quality service, broad geographic coverage (including end-to-end connectivity), solutions-oriented customer service and the timely introduction of innovative services. These customers also demand that services be delivered in a cost-effective manner and, preferably, from a single source. The Company is well positioned to satisfy such customer requirements due to (i) the successful negotiation of interconnection co-carrier agreements for Florida with BellSouth Telecommunication, Inc. ("BellSouth"), GTE Florida Incorporated ("GTE") and Sprint United Telephone-Florida/Centel-Florida ("Sprint-United") and the implementation of network to network interfaces ("NNIs") for frame relay data transmission with each of such carriers, (ii) a specialized sales and service approach employing engineering and sales professionals who design and implement customized, cost-effective telecommunications solutions, (iii) the ongoing development and integration of new telecommunications services and (iv) the strategic deployment of voice and data switches and digital fiber optic networks designed with redundancy and diversity. In December 1994, the Company acquired Phone One, Inc. ("Phone One"), a facilities-based interexchange carrier providing services to customers primarily located in Florida and Georgia. In July 1995, the Company consummated its acquisition of FiberNet USA, Inc. and FiberNet Telecommunications of Cincinnati, Inc. (collectively "FiberNet") thereby expanding its fiber optic networks into four additional metropolitan areas. On February 20, 1996, the Company entered into an agreement to purchase the telecommunications division of EMI 5 Communications Corp. ("EMI"), a wholly-owned subsidiary of Newhouse Broadcasting Corporation (the "EMI Acquisition"), for 937,500 shares of ICI Common Stock. EMI's telecommunications division, headquartered in Syracuse, New York, is a provider of frame relay based network services and interexchange private line services primarily over digital microwave networks in the northeastern United States. For the year ended December 31, 1995, EMI's revenues were approximately $43 million and the combined pro forma revenues of ICI and EMI were approximately $82 million. Although ICI believes the EMI Acquisition will be consummated, there can be no assurance that the conditions to the closing of such transaction will be satisfied and that the transaction will be consummated. The FiberNet and Phone One acquisitions have allowed (and the pending EMI Acquisition will allow) ICI to (i) expand its customer base and increase its exposure to additional interregional customers, (ii) introduce additional business customers to all of the Company's service offerings, (iii) add long distance to its portfolio of service offerings, (iv) reduce costs by eliminating overlapping facilities and removing duplicate NNIs and (v) create synergies between long distance and local service offerings such as economies of scale, usage sensitive billing capabilities and cross-selling opportunities. Subject to receipt by the Company of the requisite approvals, the Company intends to deploy switching equipment to provide local exchange and switched access services in each of its principal markets. These new switches will also augment the Company's interexchange services. The Company recently began to deploy such switching equipment in Florida and intends to deploy four switches in Florida during 1996. In addition, the Company is the first alternative local exchange carrier to enter into interconnection co-carrier agreements for Florida with each of BellSouth, GTE and Sprint-United, the three major providers of local exchange services in Florida, which provide for reciprocal rights to terminate traffic on each other's networks. Based upon Federal Communications Commission ("FCC") data and the Company's knowledge of the industry, the Company estimates that the market for local network services in 1995 was $5.0 billion in Florida, and $95 billion in the United States, substantially all of which is currently served by local exchange carriers ("LECs"). The Company has nine digital, fiber optic networks in service and one under development in a total of ten metropolitan areas. As of December 31, 1995, this infrastructure was comprised of 17,128 fiber miles and 504 route miles and was connected to 380 buildings. ICI continues to expand these networks and has identified expansion opportunities in other selected markets. This expansion should enable the Company to (i) achieve economies of scale in the management of its networks as well as the marketing and sales of its services, including local exchange services, (ii) more effectively service customers that have a presence in multiple metropolitan areas and (iii) reach a significant number of new customers. The Company has also undertaken a major expansion of its intercity network to satisfy the growing demands for enhanced network services, including frame relay networking services, ATM and Internet access. As a result, the Company had approximately 2,300 nodes, serving customer locations in 600 cities as of December 31, 1995 (not including the approximately 1,500 nodes in approximately 400 cities served by EMI), as compared to approximately 900 nodes, serving customer locations in 336 cities as of December 31, 1994. Enhanced network services, which are currently provided primarily on the Company's frame relay network, are specialized interexchange services offered by the Company for customers that need to transport large amounts of data among multiple locations. To address the growing demand for end-to-end connectivity and interoperability throughout the United States, in 1994, ICI created, in conjunction with EMI and three other regional telecommunications companies, the UniSPAN(C) consortium. This consortium, along with ICI's relationship with certain other carriers, allows the Company to terminate traffic both nationally and internationally utilizing other companies' networks and provides a flow of traffic onto the Company's networks. In addition, to further increase efficient access to a greater customer base, ICI and EMI have successfully established approximately 100 NNIs which interconnect their frame relay networks to those of BellSouth, Bell Atlantic Telephone Companies, Sprint-United, NYNEX Corporation, Ameritech Operating Companies, Southern New England Telephone Company, GTE and other carriers. According to industry sources, the frame relay services market is projected to grow at the rate of 84% per year through 1997 from its 1993 base of $144 million; however, there can be no assurance that such market growth will be realized or that the assumptions underlying such projections are reliable. 6 ICI was incorporated in the State of Delaware on November 9, 1987, as the successor to a Florida corporation that was founded in 1986. The Company's principal offices are located at 3625 Queen Palm Drive, Tampa, Florida 33619, and its telephone number is (813) 621-0011. CORPORATE STRATEGY The Company's goals, and its strategy for achieving them, distinguish the Company from many of its competitors. The Company's goal is to be a provider of a comprehensive set of integrated telecommunications services to a broad range of business and government customers, both directly and through resellers. The Company has developed the staff and knowledge-based skills required to market its services directly to business and government customers, as well as to resellers. The Company believes this strategy reduces the risk that accompanies the dependence on a few large customers. In addition, the Company has a substantial base of customers to whom it can market local exchange services when introduced. The significant capacity inherent in the Company's networks also provides the Company with the opportunity to offer additional services without a commensurate increase in operating expenses. ICI provides its customers with a specialized sales and service approach that enhances the cost effectiveness, value and reliability of the Company's service offerings to its customers. In order to become the single source provider of comprehensive telecommunications services to its customers, ICI has developed operating strategies designed to attract and retain customers, optimize the operational and cost structure of its networks and achieve desired growth. Below are the important components of these strategies. Customer Strategy ----------------- Provide Single-Source Telecommunications Services. The Company's service portfolio currently includes: high capacity access and private line services, high speed data networking (i.e., frame relay and ATM), Internet services, interexchange long distance services, switched access transport and integration services. The Company intends to continue to expand its service offerings to customers, including providing local exchange services beginning in 1996, in order to become a single-source provider of telecommunications services. Recent state and federal legislation has opened the local exchange services market to competition which until recently could only be serviced by the LECs. See "Business--Government Regulation." A single-source capability provides significant advantages for the customer and for the Company. Not only does this capability address customers' complex requirements associated with integration of diverse networks and technologies at various locations, but it also reduces customers' administrative burdens associated with service charges, billing, network monitoring, implementation, coordination and maintenance. The Company also believes that expanding its service offerings will be advantageous operationally as the Company is able to introduce additional services through existing networks and customer connections thereby leveraging the significant capacity inherent in its digital networks. Focus on Business and Government Customers. The Company's portfolio of service offerings, customer service approach, highly reliable networks, broad geographic coverage and integration capabilities are well-suited to serve the demands of telecommunications-intensive business and government customers. The Company's existing business customer base includes firms in the retail, financial services, grocery, manufacturing and other industry segments. The Company has entered into a contract with the State of Florida to provide frame relay based network services for the State Division of Communications. These services will be deployed statewide and utilized by many of the State's agencies. In addition, upon the consummation of the EMI Acquisition, the Company would be a provider of telecommunications services to the State of New York's Empire Net which connects numerous agencies within the State. The Company believes that its success in providing these services to government agencies will be replicated in other states within the Company's service territory. 7 Develop IXC and Value-Added Reseller Relationships. Recent changes in state and federal regulation have accelerated ICI's ability to deliver local exchange services and have provided LECs with incentives to foster local exchange competition. In addition, as the IXCs enter the local exchange business, the Company believes that they will seek to gain access to the local exchange services market by either developing local network capacity or by purchasing such capacity from alternative service providers. The Company believes that these developments are likely to make ICI an attractive choice for joint ventures and preferred vendor arrangements with the IXCs, LECs and other telecommunications related companies. Such arrangements would benefit the Company by enabling ICI to more rapidly recover its capital investment in switches by increasing the traffic through its networks. These arrangements should enable ICI to achieve greater market share and reach new market segments more rapidly than it could otherwise. The Company intends to solicit IXCs, out of region LECs, cable companies and other value added resellers to resell its local exchange services, when available. Maintain and Develop Long-Term Relationships. By providing customized telecommunications solutions to its customers, the Company develops a sense of partnership with its customers. As a result, the Company believes that a growing portion of its revenue base will be associated with long-term customer relationships. Provide Cost-Effective Service Offerings. ICI has developed a number of innovative services designed to provide cost-effective telecommunications solutions to its customers. Each of the Company's individually packaged services is competitively priced and when integrated into a comprehensive telecommunications package provides significant value over comparable LEC and IXC service offerings. The Company believes that the introduction of its services at competitive market rates has stimulated demand from small to medium-sized customers thereby broadening the market for ICI's services. Expand Solutions-Oriented Sales Effort. The Company has rapidly expanded and intends to continue to expand the utilization of its direct sales and support team consisting of engineering and sales professionals to (i) increase the level of integration between the Company's and the customer's operations thus making the customer more reliant on the Company's services and (ii) broaden the services that can be offered by the Company. During 1995, ICI increased its sales representatives from 39 to 57. The Company believes its solutions- oriented sales approach enables the Company to provide customers with effective customized solutions to their telecommunications requirements. Network Strategy ---------------- Control Franchise Points of the Networks. The Company focuses its capital deployment on the segments of its networks that the Company believes will provide it with the highest revenue potential and the greatest long-term competitive advantage. The Company believes that connections to customers and building entries represent an important strategic component of its networks. These connections provide the Company with the platform to sell a variety of services to existing or potential customers within a building. ICI also believes that the deployment of switching technology and advanced network electronics enables the Company to better configure its networks to provide cost effective and customized solutions to its customers. The ability to offer these types of solutions differentiates ICI from commodity transport service providers. Extend Coverage to Provide End-to-End Connectivity. The Company has entered into interconnection co-carrier agreements with the large LECs in Florida, which allow the Company access to substantially all business and government telephones in Florida. The Company anticipates entering into similar arrangements with LECs in other markets. To better serve its end user customers, the Company has also interconnected its frame relay network to those of BellSouth, GTE, Bell Atlantic and several other carriers, thereby substantially expanding the reach of its networks. Upon consummation of the EMI Acquisition, ICI would provide originating and terminating transport services in 45 states and maintain points of presence ("POPs") for interexchange and enhanced network services in most major cities in these states. 8 Deploy Capital Cost Effectively on a Demand Driven Basis. The increasing geographic coverage of the Company's services and the growing availability of leased capacity at competitive rates have led the Company to lease network capacity in various areas prior to, or in lieu of, building additional capacity. Utilizing leased facilities enables the Company to (i) meet customers' needs more rapidly, (ii) improve the utilization of ICI's existing networks, (iii) add revenue producing customers before building networks thereby reducing the risks associated with network construction and (iv) focus its capital expenditures in geographic areas where network construction or acquisition will provide a competitive advantage. Growth Strategy --------------- Accelerate Internal Growth. By focusing on business and government customers and maintaining high-quality and cost-effective services, the Company generated significant internal growth. The Company believes that its customer and network strategies will continue to enable ICI to expand its services and markets, increase its revenue base and compete effectively in a dynamic marketplace. Selectively Acquire Existing Networks and Services. Over the past few years, a portion of the Company's growth has been accomplished through acquisitions (such as FiberNet, Phone One and EMI (pending)) and joint ventures or selling relationships (such as those ICI has with its UniSPAN(C) partners). The Company continues to examine from time to time various acquisition and joint venture proposals to accelerate its rate of growth. In addition to the usual financial considerations, ICI assesses each opportunity to determine if either: (i) current network traffic into and out of the geographic areas served by the target company warrant developing a presence in those geographic areas or (ii) the target company offers services consistent with the Company's service portfolio which are not currently offered by ICI utilizing technology compatible with that utilized by ICI. Furthermore, ICI carefully evaluates the target company's corporate culture to assess its ability to integrate the target company's personnel and systems into the Company. While management does not believe that acquisitions are necessary to achieve the Company's strategic goals, strategic alliances with or acquisitions of appropriate companies may accelerate achievement of those goals by creating operating synergies and more rapid expansion of the Company's networks or services. Although the Company considers potential acquisitions from time to time, other than the EMI Acquisition, no agreement or agreement in principle has been reached for any acquisition. 9 THE OFFERING Common Stock Offered By the Company............ 4,000,000 Shares. By the Selling Stockholders............. 496,689 Shares. Total................... 4,496,689 Shares. Common Stock Outstanding after the Offering......... 14,386,218 (1) Use of Proceeds............. The net proceeds of the Offering to the Company, after underwriting discounts, commissions and expenses, are estimated to be $98.1 million. The net proceeds to the Company will be used to finance the continued expansion of the Company's telecommunications networks and the installation of voice switches, which will allow the Company to offer local exchange service, and for general corporate purposes, including working capital. The Company may use a portion of the net proceeds that it receives to repurchase a warrant to purchase 10% of one of the Company's subsidiaries. In addition, the Company may use net proceeds that it receives to fund acquisitions of assets or businesses which are involved in the telecommunications business. Although the Company considers potential acquisitions from time to time, other than the EMI Acquisition, no agreement or agreement in principle has been reached for any acquisition. The Company will not receive any of the proceeds from the sale of Shares by the Selling Stockholders. Nasdaq National Market Symbol..................... ICIX Concurrent Offering......... The Company has concurrently registered $330,000,000 principal amount at maturity of 12 1/2% Senior Discount Notes, to generate gross proceeds of $179,919,300, for sale by the Company (the "Concurrent Offering"). This Offering is not contingent upon the consummation of the Concurrent Offering. Consent Solicitation........ The Company has obtained from the holders of a majority of the aggregate principal amount outstanding of the Company's 13 1/2% Series B Senior Notes due 2005 (the "Existing Senior Notes") consents to amend certain provisions of the indenture governing such notes in order to permit the Company to incur additional debt (including the Senior Discount Notes offered concurrently herewith) and to amend certain other covenants of the Existing Senior Notes. On April 26, 1996, the Company and SunTrust Bank, Central Florida, National Association, as trustee, executed the amended and restated indenture governing the Existing Senior Notes. - -------- (1) Excludes shares of Common Stock issuable upon (i) the consummation of the EMI Acquisition, (ii) the exercise of all outstanding options issued pursuant to the Company's employee stock option plans and (iii) the exercise of the Outstanding Warrants (as defined herein). See "Description of Capital Stock." Also excludes up to 674,503 which may be issued to the Underwriters solely to cover over-allotments. See "Underwriting." 10 SUMMARY FINANCIAL AND OTHER OPERATING DATA Statement of operations and balance sheet data presented below as of and for the five years in the period ended December 31, 1995 have been derived from the consolidated financial statements of the Company, which financial statements have been audited by Ernst & Young LLP, independent certified public accountants. The operating results of Phone One are included in the Company's consolidated operating results since December 2, 1994. The operating results of FiberNet have been included in the Company's consolidated operating results since March 1, 1995. The pro forma information gives effect to the acquisition of FiberNet and the EMI Acquisition (pending) as if they occurred at January 1, 1995 for operations information and December 31, 1995 for balance sheet and statistical information. The following financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and the Consolidated Financial Statements of the Company and the Notes thereto, included elsewhere in this Prospectus.
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA) PRO FORMA(1) YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------- ------------ 1991 1992 1993 1994 1995 1995 ------- ------ ------- ------- -------- ------------ STATEMENT OF OPERATIONS: Revenue................ $ 5,184 $7,030 $ 8,292 $14,272 $ 38,631 $ 81,687 Expenses: Facilities administration and maintenance and line costs................. 1,483 1,760 2,843 5,396 22,989 62,604 Selling, general and administrative........ 2,050 2,607 3,893 6,412 14,993 18,295 Depreciation and amortization.......... 1,570 2,190 3,020 5,132 10,196 12,808 ------- ------ ------- ------- -------- -------- 5,103 6,557 9,756 16,940 48,178 93,707 ------- ------ ------- ------- -------- -------- Operating income (loss)................ 81 473 (1,464) (2,668) (9,547) (12,020) Other income (expense) Interest expense...... (1,063) (1,031) (844) (1,218) (13,767) (13,826) Interest and other income............... 23 323 234 819 4,060 4,082 Income tax benefit.... -- -- -- -- 97 97 ------- ------ ------- ------- -------- -------- Loss before extraordinary item... (959) (235) (2,074) (3,067) (19,157) $(21,667) ======== Extraordinary loss on early extinguishment of debt.............. -- -- -- -- (1,592) ======= ====== ======= ======= ======== Net loss............... $ (959) $ (235) $(2,074) $(3,067) $(20,749) ======= ====== ======= ======= ======== Net loss per share:(2) Loss before extraordinary item... $ (1.01) $ (.10) $ (.29) $ (.34) $ (1.91) $ (1.95) ======== Extraordinary loss.... -- -- -- -- (.16) ------- ------ ------- ------- -------- Net loss.............. $ (1.01) $ (.10) $ (.29) $ (.34) $ (2.07) ======= ====== ======= ======= ======== Weighted average number of shares outstanding........... 1,354 4,797 7,077 8,956 10,036 11,087 OTHER DATA: Ratio of earnings to combined fixed charges and preferred stock dividends(3).......... -- -- -- -- -- -- Earnings before interest, income taxes, depreciation and amortization ("EBITDA")(4)......... $ 1,651 $2,663 $ 1,556 $ 2,464 $ 649 $ 788 Capital expenditures, including acquisitions of businesses, net of cash acquired......... $ 3,463 $8,818 $10,486 $13,731 $ 31,915 -- PRO FORMA(5) DECEMBER 31, DECEMBER 31, ------------------------------------------- ------------ 1991 1992 1993 1994 1995 1995 ------- ------ ------- ------- -------- ------------ NETWORK DATA:(6) Buildings connected.... 110 161 234 293 380 402 Route miles............ 165 240 335 378 504 4,904 Fiber miles............ 2,956 6,184 10,239 11,227 17,128 17,128 Number of city-based networks in service... 3 4 5 6 9 9 ENHANCED NETWORK SERVICES:(6) Nodes(7)............... -- -- 100 900 2,300 3,800 Cities(8).............. -- -- 37 336 600 900 Switches............... -- -- 4 12 31 52 EMPLOYEES(6)............ 26 49 58 146 287 434
PRO FORMA PRO FORMA(9) AS ADJUSTED(10) DECEMBER 31, DECEMBER 31, DECEMBER 31, ----------------------------------------- ------------ --------------- 1991 1992 1993 1994 1995 1995 1995 ------- ------- ------- ------- -------- ------------ --------------- BALANCE SHEET DATA: Cash and cash equivalents(11)....... $ 575 $ 1,775 $27,954 $10,208 $ 50,997 $ 50,997 $322,249 Working capital (deficit)(12)......... (949) 8,999 25,712 9,588 70,353 70,103 341,355 Total assets........... 17,577 36,174 61,219 74,086 216,018 233,143 511,172 Long-term debt (including current maturities)(13)....... 9,549 9,647 9,647 10,072 159,307 159,307 339,226 Total stockholders' equity (deficit)...... (7,526) 21,257 45,987 52,033 40,254 57,129 155,239
11 - -------- (1) Gives effect to the acquisitions of FiberNet and EMI (pending) as if they occurred at the beginning of the period presented. Pro forma information excludes the effects of the historical extraordinary item. (2) Net loss per share for the years ended December 31, 1991 and 1992 have been increased by the amount of redeemable preferred stock dividends. Additionally, net loss per share for the year ended December 31, 1991 has been increased to reflect the effects of certain options and warrants issued shortly before ICI's initial public offering in April, 1992 in accordance with a Staff Accounting Bulletin of the Commission. (3) For purposes of calculating the ratio of earnings to fixed charges: (i) earnings consist of loss before income taxes, plus fixed charges excluding capitalized interest and (ii) fixed charges consist of interest expensed and capitalized, plus amortization of deferred financing costs, plus the portion of rent expense under operating leases deemed by the Company to be representative of the interest factor, as well as dividends on redeemable preferred stock. For the years ended December 31, 1991, 1992, 1993, 1994 and 1995 the Company's earnings were insufficient to cover fixed charges by $1,061, $355, $2,288, $3,324 and $19,931, respectively. For the year ended December 31, 1995, the Company's pro forma earnings including $23,634 of interest expense related to the Concurrent Offering were insufficient to cover fixed charges by $46,076. (4) EBITDA consists of earnings before interest, income taxes, depreciation and amortization. In addition the 1995 amount excludes $1,592 related to an extraordinary loss on the early extinguishment of debt. EBITDA is provided since it is a measure commonly used in the telecommunications industry to measure operating performance, asset value and financial leverage. It is presented to enhance the reader's understanding of the Company's operating results and is not intended to represent cash flow for the period indicated. See Consolidated Statements of Cash Flows contained in the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus. (5) Gives effect to the EMI Acquisition (pending). Certain numbers are estimated based on information provided to the Company by EMI. (6) Based upon Company records. (7) An individual point of origination and termination of data served by the ICI enhanced network. All node numbers are approximate. (8) The number of discrete postal cities to which enhanced services are provided. (9) Gives effect to the EMI Acquisition (pending). (10) Gives effect to (i) the Offering (4.0 million shares at a price of $26.00 per share), the Concurrent Offering and the application of the net proceeds therefrom and (ii) the EMI Acquisition (pending), but does not reflect any costs associated with obtaining consents from the holders of the Existing Senior Notes, including approximately $4.3 million paid to certain of such holders as consideration for such consents. (11) Excludes Restricted Investments held as of December 31, 1995 for the repayment of certain interest on the Existing Senior Notes. (12) Includes $18,854 of Restricted Investments as of December 31, 1995 classified as a current asset. (13) Excludes capital lease obligations at December 31, 1991, 1992, 1993, 1994 and 1995 and December 31, 1995 (pro forma) of $1,512, $2,095, $1,967, $6,455, $6,238 and $6,238, respectively. The Company's unaudited revenues, EBITDA, and loss for the three months ended March 31, 1996 were approximately $13.5 million, $(1.7) million and $(8.9) million, respectively, as compared to $8.7 million, $.9 million and $(1.3) million, respectively, for the three months ended March 31, 1995. 12 RISK FACTORS Substantial Indebtedness; Insufficiency of Earnings to Cover Fixed Charges. At December 31, 1995, after giving pro forma effect to (i) the Offering and the Concurrent Offering and the application of the proceeds therefrom and (ii) the EMI Acquisition, the Company would have had outstanding approximately $355.9 million in aggregate principal amount of indebtedness and other liabilities on a consolidated basis (including trade payables), of which approximately $348.6 million would have been indebtedness and other liabilities of the Company and approximately $7.3 million would have been indebtedness and other liabilities of the Company's subsidiaries (excluding approximately $17.4 million due to ICI). The degree to which the Company is leveraged could have important consequences to holders of the Common Stock, including the following: (i) the Company will have significant cash interest expense and principal repayment obligations with respect to outstanding indebtedness; (ii) the Company's significant degree of leverage could increase its vulnerability to changes in general economic conditions or increases in prevailing interest rates; (iii) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes could be impaired; and (iv) the Company may be more leveraged than certain of its competitors, which may be a competitive disadvantage. For the year ended December 31, 1995, and on a pro forma basis after giving effect to (i) the Offering, the Concurrent Offering and the application of the proceeds therefrom and (ii) the acquisitions of FiberNet and EMI as if they had occurred on January 1, 1995, the Company's pro forma earnings would have been inadequate to cover its pro forma fixed charges by $46.1 million, primarily as a result of operating expenses associated with the expansion of the Company's networks and operations. In order for the Company to meet its debt service obligations, the Company will need to substantially improve its operating results. There can be no assurance that the Company's operating results will be of sufficient magnitude to enable the Company to meet its debt service obligations. In the absence of such operating results, the Company could face substantial liquidity problems and might be required to raise additional financing through the issuance of debt or equity securities; however, there can be no assurance that ICI would be successful in raising such financing, or the terms or timing thereof. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Limited Operations; History of Net Losses. The Company's business commenced in 1987 and substantially all of the Company's revenues are derived from enhanced network services, integration services, long distance services and certain local network services. The Company is expecting to substantially increase the size of its operations and number of service offerings in the near future. Prospective investors, therefore, have limited historical financial information about the Company upon which to base an evaluation of the Company's performance. Given the Company's limited operating history, there is no assurance that it will be able to compete successfully in the telecommunications business. The development of the Company's business and the installation and expansion of its networks require significant expenditures, a substantial portion of which are incurred before the realization of revenues. Together with the associated early operating expenses, these capital expenditures will result in negative cash flow until an adequate customer base is established. ICI reported net losses of approximately $2.1 million, $3.1 million and $20.7 million for the years ended December 31, 1993, 1994 and 1995, respectively. Although its revenues have increased in each of the last three years, ICI has incurred significant increases in expenses associated with the development and expansion of its fiber optic networks, services and customer base. There can be no assurance that ICI will achieve or sustain profitability in the future. Consummation of the EMI Acquisition. On February 20, 1996, the Company signed an agreement with EMI to acquire its telecommunications division. The significant conditions to closing the acquisition are (i) receipt of federal and state regulatory and municipal approvals and (ii) receipt of certain third party consents to the assignment of various contracts, all of which must be obtained by September 30, 1996. The terms of the EMI acquisition agreement provide for the acquisition by ICI of certain (but not all) of the telecommunications assets of EMI if certain consents are not obtained. Although ICI believes that all of the conditions to the 13 consummation of the acquisition will be satisfied by September 30, 1996, there can be no assurance that such conditions will be timely satisfied and that the EMI Acquisition will be consummated. New Telecommunications Act and Uncertainty of Future Regulation. The Company is subject to federal regulation by the FCC and local service regulation by the public service commissions in the states in which it provides jurisdictionally interstate services. The Company may also be subject to regulation by the public service commissions of other states into which the Company is expanding. In addition, many of these regulations may be subject to judicial review, the result of which ICI is unable to predict. The FCC has determined that non-dominant carriers, such as the Company, are required to file interstate tariffs on an ongoing basis. The recently enacted Telecommunications Act of 1996 (the "1996 Act") provides the FCC with the authority to forebear from imposing any regulations it deems unnecessary, including requiring non-dominant carriers to file tariffs. The FCC has initiated two different proceedings which may eliminate the tariff-filing obligation of the Company, however, there can be no assurance that the FCC will so forebear. The Company is also generally subject to state certification, tariff filing and other regulatory requirements. Challenges to tariffs by third parties may cause the Company to incur significant legal and administrative expenses. Although the trend in federal and state regulations appears to favor increased competition, no assurance can be given that changes in current or future regulations adopted by the FCC or state regulatory bodies or legislative initiatives would not have a material adverse effect on the Company. Risks of Implementation; Need to Obtain Permits and Rights of Way. The Company is continuing to expand its existing networks. In addition, the Company has a network under development in St. Louis, Missouri. The Company has identified other expansion opportunities in Florida and other parts of the eastern United States and is currently extending the reach of its networks to pursue such opportunities. There can be no assurance that the Company will be able to expand its existing networks or construct or acquire new networks as currently planned on a timely basis. The expansion of the Company's existing networks and its construction or acquisition of new networks will be dependent, among other things, on its ability to acquire rights-of-way and any required permits on satisfactory terms and conditions and on its ability to finance such expansion, acquisition and construction. These factors and others could adversely affect the expansion of the Company's customer base on its existing networks and commencement of operations on new networks. If the Company is not able to expand, acquire or construct its networks in accordance with its plans, the growth of its business would be materially adversely affected. Competition. In each of its markets, the Company faces significant competition for the local network services it offers from LECs, which currently dominate their local telecommunications markets. LECs have long- standing relationships with their customers which relationships may create competitive barriers. Furthermore, LECs may have the potential to subsidize competitive service from monopoly service revenues. In addition, a continuing trend toward business combinations and alliances in the telecommunications industry may create significant new competitors to the Company. The Company also faces competition in most markets in which it operates from one or more CAPs operating fiber optic networks. In addition, the Company faces competition in its network systems integration business from equipment manufacturers, the regional Bell operating companies ("RBOCs") and other LECs, long distance carriers and systems integrators, and in its enhanced network services business from local telephone companies, long distance carriers, very small aperture terminal ("VSAT") providers and others. Many of the Company's existing and potential competitors have financial, personnel and other resources significantly greater than those of the Company. The Company believes that various legislative initiatives, including the recently enacted 1996 Act, have removed remaining legislative barriers to local exchange competition. Nevertheless, in light of the passage of the 1996 Act, regulators are also likely to provide LECs with increased pricing flexibility as competition increases. If LECs are permitted to lower their rates substantially or engage in excessive volume or discount pricing practices for their customers, the net income or cash flow of competitive local exchange carriers, including the Company, could be materially adversely affected. In addition, while the Company currently competes with AT&T, Inc. ("AT&T"), MCI Communications Corporation ("MCI") and others in the interexchange services market, the recent federal legislation permits the RBOCs to provide interexchange services once certain criteria are met. If the RBOCs begin to provide such services, they will be in a position to offer single source service similar to that being offered by ICI. In addition, AT&T, MCI and other interexchange carriers have announced their intent to enter into the local exchange services market. The Company cannot predict the number of competitors that will emerge as a result of any new federal and state regulatory or 14 legislative actions. Competition from the RBOCs with respect to interexchange services or from AT&T and MCI with respect to local exchange services could have a material adverse effect on the Company's business. Significant Capital Requirements. Expansion of the Company's existing networks and services and the development of new networks and services require significant capital expenditures. ICI expects to fund its capital requirements through existing resources, internally generated funds, joint ventures and debt or equity financing, including capital raised through the Offering and the Concurrent Offering, as appropriate. There can be no assurance, however, that ICI will be successful in producing sufficient cash flow or raising sufficient debt or equity capital on terms that it will consider acceptable. In addition, the Company's future capital requirements will depend upon a number of factors, including marketing expenses, staffing levels and customer growth, as well as other factors that are not within the Company's control, such as competitive conditions, government regulation and capital costs. Failure to consumate the Concurrent Offering or to generate sufficient funds may require ICI to delay or abandon some of its future expansion or expenditures, which would have a material adverse effect on its growth and its ability to compete in the telecommunications industry. Expansion Risk. The Company is experiencing a period of rapid expansion which management expects will increase in the near future. This growth has increased the operating complexity of the Company as well as the level of responsibility for both existing and new management personnel. The Company's ability to manage its expansion effectively will require it to continue to implement and improve its operational and financial systems and to expand, train and manage its employee base. The Company's inability to effectively manage its expansion could have a material adverse effect on its business. A portion of the Company's expansion may occur through acquisitions as an alternative to direct investments in the assets required to implement the expansion. No assurance can be given that suitable acquisitions can be identified, financed and completed on acceptable terms, or that the Company's future acquisitions, if any, will be successful. Risk of New Service Acceptance. The Company offers a number of services that the Company believes are important to its long-term growth. The success of these services will be dependent upon, among other things, the willingness of customers to accept new telecommunications technology. No assurance can be given that such acceptance will occur; the lack of such acceptance could have a material adverse effect on the Company. Rapid Technological Changes. The telecommunications industry is subject to rapid and significant changes in technology. While ICI believes that, for the foreseeable future, these changes will neither materially affect the continued use of its fiber optic networks nor materially hinder its ability to acquire necessary technologies, the effect on the business of ICI of technological changes such as changes relating to emerging wireline and wireless transmission technologies, including software protocols, cannot be predicted. Dependence on Key Personnel. The Company's business is managed by a small number of key management and operating personnel, the loss of certain of whom could have a material adverse impact on the Company's business. The Company believes that its future success will depend in large part on its continued ability to attract and retain highly skilled and qualified personnel. None of the Company's key executives, other than David C. Ruberg, President, Chief Executive Officer and Chairman of the Board, is a party to an employment agreement with the Company. Risk of Cancellation or Non-Renewal of Network Agreements, Licenses and Permits. The Company has lease and/or purchase agreements for rights-of-way, utility pole attachments, conduit and dark fiber for its fiber optic networks. Although the Company does not believe that any of these agreements will be cancelled in the near future, cancellation or non-renewal of certain of such agreements could materially adversely affect the Company's business in the affected metropolitan area. In addition, the Company has certain licenses and permits from local government authorities. The 1996 Act requires that local government authorities treat telecommunications carriers in a competitively neutral, non-discriminatory manner, and that most utilities, including most LECs and electric companies, afford alternative carriers access to their poles, conduits and rights-of-way at reasonable rates on non-discriminatory terms and conditions. There can be no assurance that the Company will be able to maintain its existing franchises, permits and rights or to obtain and maintain the other franchises, permits and rights needed to implement its strategy on acceptable terms. 15 Dependence on Business from IXCs. For the year ended December 31, 1995, approximately 10% of the Company's consolidated revenues were attributable to access services provided to IXCs. The loss of access revenues from IXCs in general could have a material adverse effect on the Company's business. See "Business--The Company--Customer Strategy." In addition, the Company's growth strategy assumes increased revenues from IXCs following the deployment of switches on its networks and the provision of switched access origination and termination services. There is no assurance that the IXCs will continue to increase their utilization of the Company's services, or will not reduce or cease their utilization of the Company's services, which could have a material adverse effect on the Company. Lack of Dividend History. The Company has never declared or paid any cash dividends on its Common Stock and does not expect to declare any such dividends in the foreseeable future. Payment of any future dividends will depend upon earnings and capital requirements of the Company, the Company's debt facilities and other factors the Board of Directors considers appropriate. ICI intends to retain its earnings, if any, to finance the development and expansion of its business, and therefore does not anticipate paying any dividends in the foreseeable future. In addition, the terms of the indenture governing the Senior Discount Notes offered concurrently herewith (the "Indenture") and the indenture governing the Existing Senior Notes restrict the payment of dividends. Business Combinations; Change of Control. The Company has from time to time held, and continues to hold, preliminary discussions with (i) potential strategic investors who have expressed an interest in making an investment in or acquiring the Company and (ii) potential joint venture partners looking toward the formation of strategic alliances that would expand the reach of the Company's networks or services without necessarily requiring an additional investment in the Company. In addition to providing additional growth capital, management believes that an alliance with an appropriate strategic investor would provide operating synergy to, and enhance the competitive positions of, both ICI and the investor within the rapidly consolidating telecommunications industry. There can be no assurance that agreements for any of the foregoing will be reached. However, management does not believe that the consummation of any such agreements are necessary to successfully implement its strategic plans. An investment, business combination or strategic alliance could constitute a Change of Control. Each of the Indenture and the indenture governing the Existing Senior Notes provides that a Change of Control would require the Company to repay the indebtedness outstanding under such instruments. If a Change of Control does occur, there is no assurance that the Company would have sufficient funds to make such repayments or could obtain any additional debt or equity financing that could be necessary in order to repay the Senior Discount Notes or Existing Senior Notes. Anti-Takeover Provisions. The Company's Certificate of Incorporation and Bylaws, the provisions of the Delaware General Corporation Law, the Existing Senior Notes and the Senior Discount Notes may make it difficult in some respects to effect a change in control of the Company and replace incumbent management. In addition, the Company's Board of Directors has adopted a Stockholder's Rights Plan, pursuant to which rights to acquire a newly created series of Preferred Stock, exercisable upon the occurrence of certain events, were distributed to its stockholders. The existence of these provisions may have a negative impact on the price of the Common Stock, may discourage third party bidders from making a bid for the Company, or may reduce any premiums paid to stockholders for their Common Stock. In addition, the Board has the authority to fix the rights and preferences of, and to issue shares of, the Company's Preferred Stock, which may have the effect of delaying or preventing a change in control of the Company without action by its stockholders. Shares Eligible for Future Sale. Future sales of shares by existing stockholders under Rule 144 of the Securities Act, or through the exercise of outstanding registration rights or the issuance of shares of Common Stock upon the exercise of options or warrants could materially adversely affect the market price of shares of Common Stock and could materially impair the Company's future ability to raise capital through an offering of equity securities. Substantially all of the Company's outstanding shares, other than those held by affiliates, are 16 transferable without restriction under the Securities Act. Not including the Shares registered on behalf of the Selling Stockholders in the Registration Statement of which this Prospectus forms a part, the Company has filed registration statements covering the offering of approximately 1,700,000 shares of Common Stock by selling security holders. In addition, the Company has registered 1,346,000 shares of Common Stock for issuance upon exercise of options granted to its employees under the Company's 1992 Stock Plan and intends to register 1,500,000 shares for issuance pursuant to the Long-Term Incentive Plan, which plan is subject to stockholder approval at the Company's annual meeting. Options to acquire 370,147 shares of Common Stock were currently exercisable under the 1992 Stock Plan at March 29, 1996. No predictions can be made as to the effect, if any, that market sales of such shares or the availability of such shares for future sale will have on the market price of shares of Common Stock prevailing from time to time. 17 USE OF PROCEEDS The net proceeds to the Company of the Offering, after underwriting discounts, commissions and expenses, are estimated to be $98.1 million. Such net proceeds, together with the net proceeds of the Concurrent Offering, estimated to be $173.1 million, will be used by the Company to finance the continued expansion of ICI's telecommunications networks (including the networks to be acquired from EMI) and the installation of voice switches, which will allow the Company to offer local exchange service, and for general corporate purposes, including working capital. The Company will not receive any of the proceeds from the sale of Shares by the Selling Stockholders. A portion of the Company's expansion may occur through acquisitions (utilizing cash or securities of the Company) as an alternative to direct investments in the assets required to implement the expansion. The businesses that the Company may acquire will likely consist of companies that own existing networks or companies that provide services that complement the Company's existing businesses. The Indenture and the indenture governing the Existing Senior Notes prohibit the Company from acquiring assets or businesses which are not involved in the Telecommunications Business (as defined therein). Although the Company considers potential acquisitions from time to time, other than the EMI Acquisition, no agreement or agreement in principle to acquire or effect any material acquisition has been reached. The Company is acquiring the telecommunications division of EMI in exchange for Common Stock. The purchase agreement does however provide for a contingent cash payment in the amount of $594,000 if a certain planned network expansion is completed prior to the closing of the EMI Acquisition. If such expansion is completed, a portion of the net proceeds to the Company of the Offering and the Concurrent Offering may be used to make such contingent payment. A portion of the net proceeds may be used to repurchase a warrant to purchase ten percent of the capital stock of FiberNet North Carolina, Inc., a wholly-owned subsidiary of the Company. Prior to the application of the net proceeds to the Company of the Offering as described above, such funds will be invested in short-term investment grade securities. 18 PRICE RANGE OF COMMON STOCK The Common Stock is listed for trading on the Nasdaq National Market under the symbol "ICIX". As of March 15, 1996, based upon the number of holders of record and an estimate of the number of individual participants represented by security position listings, the Company had approximately 3,200 stockholders. The following table sets forth the high and low sales prices of the Common Stock as reported by the Nasdaq National Market for each of the quarters indicated:
QUARTER HIGH LOW ------- ------ ------ 1995 First................................................... 15 11 Second.................................................. 13 8 1/2 Third................................................... 17 1/2 10 1/2 Fourth.................................................. 17 1/2 11 1996 First .................................................. 19 3/4 13 7/8 Second (through May 8, 1996)............................ 27 1/4 17 3/4
On May 8, 1996, the last reported closing price of the Common Stock on the Nasdaq National Market was $26.063. DIVIDEND POLICY ICI has never declared or paid cash dividends on its Common Stock. ICI intends to retain its earnings, if any, to finance the development and expansion of its business, and therefore does not anticipate paying any dividends in the foreseeable future. In addition, the terms of the Senior Discount Notes offered concurrently herewith and the terms of the Existing Senior Notes restrict the payment of dividends. See "Description of Capital Stock--Dividend Restrictions." When such restrictions no longer exist, the decision whether to pay dividends will be made by the Board of Directors in light of conditions then existing, including the Company's results of operations, financial condition and capital requirements, business conditions and other factors. The payment of dividends on the Common Stock is also subject to the preferences that may be applicable to any then outstanding preferred stock. DILUTION The net tangible book value of the Common Stock at December 31, 1995 was $13.3 million or $1.28 per share. The net tangible book value per share represents the amount of total tangible assets of the Company reduced by the amount of total liabilities and divided by the number of shares of Common Stock outstanding. After giving effect to (i) the Offering and the Concurrent Offering and the application of the estimated net proceeds of approximately $271.2 million therefrom and (ii) the proposed EMI Acquisition, the adjusted pro forma net tangible book value of the Company as of December 31, 1995 would have been approximately $121.5 million or $7.94 per share (representing an immediate increase in net tangible book value to existing stockholders of $108.2 million or $6.66 per share on a pro forma basis). This would result in an immediate dilution in the net tangible book value of $18.06 per share to investors purchasing Common Stock. Dilution in net tangible book value represents the difference between the price per share to be paid by purchasers of Common Stock in the Offering and the pro forma net tangible book value as of December 31, 1995. 19 CAPITALIZATION The following table sets forth the consolidated actual and consolidated pro forma cash and cash equivalents and capitalization of the Company at December 31, 1995. This table should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto, and other information included elsewhere in this Prospectus.
AS OF DECEMBER 31, 1995 ---------------------- ACTUAL PRO FORMA(1) -------- ------------ (IN THOUSANDS) Cash and cash equivalents(2)............................. $ 50,997 $322,249 ======== ======== Long-term debt (including current maturities): 13 1/2% Series B Senior Notes due 2005................. $158,984 $158,984 Senior Discount Notes.................................. -- 179,919 Other long-term debt................................... 323 323 Capital lease obligations.............................. 6,238 6,238 -------- -------- Total long-term debt................................. 165,545 345,464 -------- -------- Stockholders' equity: Common stock and additional paid-in capital............ 74,197 189,182 Accumulated deficit.................................... (33,943) (33,943) -------- -------- Total stockholders' equity............................... 40,254 155,239 -------- -------- Total capitalization..................................... $205,799 $500,703 ======== ========
- -------- (1) Gives effect to (i) the Offering, the Concurrent Offering and the application of the net proceeds therefrom and (ii) the EMI Acquisition (pending). (2) Excludes Restricted Investments held as of December 31, 1995 for the repayment of certain interest on the Existing Senior Notes and does not reflect any costs associated with obtaining consents from the holders of the Existing Senior Notes, including approximately $4.3 million paid to certain of such holders as consideration for such consents. 20 SELECTED FINANCIAL AND OTHER OPERATING DATA The selected financial data and balance sheet data presented below as of and for the five years in the period ended December 31, 1995 have been derived from the consolidated financial statements of the Company, which financial statements have been audited by Ernst & Young LLP, independent certified public accountants. The operating results of Phone One are included in the Company's consolidated operating results since December 2, 1994 (the date of acquisition by the Company). The operating results of FiberNet have been included in the Company's consolidated operating results since March 1, 1995. The pro forma information gives effect to the acquisition of FiberNet and the EMI Acquisition (pending) as if they occurred at January 1, 1995 for operations information and December 31, 1995 for balance sheet and statistical information. The following financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and the Consolidated Financial Statements of the Company and the Notes thereto, included elsewhere in this Prospectus. (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
PRO FORMA(1) YEAR ENDED DECEMBER 31, YEAR ENDED -------------------------------------------- DECEMBER 31, 1991 1992 1993 1994 1995 1995 ------- ------- ------- ------- -------- ------------- SELECTED FINANCIAL DATA: Revenue................ $ 5,184 $ 7,030 $ 8,292 $14,272 $ 38,631 $ 81,687 Expenses Facilities administration and maintenance and line costs................. 1,483 1,760 2,843 5,396 22,989 62,604 Selling, general and administrative........ 2,050 2,607 3,893 6,412 14,993 18,295 Depreciation and amortization.......... 1,570 2,190 3,020 5,132 10,196 12,808 ------- ------- ------- ------- -------- -------- 5,103 6,557 9,756 16,940 48,178 93,707 ------- ------- ------- ------- -------- -------- Operating income (loss)................ 81 473 (1,464) (2,668) (9,547) (12,020) Other income (expense) Interest expense...... (1,063) (1,031) (844) (1,218) (13,767) (13,826) Interest and other income............... 23 323 234 819 4,060 4,082 Income tax benefit.... -- -- -- -- 97 97 ------- ------- ------- ------- -------- -------- Loss before extraordinary item... (959) (235) (2,074) (3,067) (19,157) $(21,667) ======== Extraordinary loss on early extinguishment of debt.............. -- -- -- -- (1,592) ------- ------- ------- ------- -------- Net loss............... $ (959) $ (235) $(2,074) $(3,067) $(20,749) ======= ======= ======= ======= ======== Net loss per share:(2) Loss before extraordinary item... $ (1.01) $ (.10) $ (.29) $ (.34) $ (1.91) $ (1.95) ======== Extraordinary loss.... -- -- -- -- (.16) ------- ------- ------- ------- -------- Net loss.............. $ (1.01) $ (.10) $ (.29) $ (.34) $ (2.07) ======= ======= ======= ======= ======== Weighted average number of shares outstanding........... 1,354 4,797 7,077 8,956 10,036 11,087 OTHER DATA: Ratio of earnings to combined fixed charges and preferred stock dividends(3).......... -- -- -- -- -- -- Earnings before interest, income taxes, depreciation and amortization ("EBITDA")(4)......... $ 1,651 $ 2,663 $ 1,556 $ 2,464 $ 649 $ 788 Capital expenditures, including acquisitions of businesses, net of cash acquired......... $ 3,463 $ 8,818 $10,486 $13,731 $ 31,915 -- DECEMBER 31, PRO FORMA (5) -------------------------------------------- DECEMBER 31, 1991 1992 1993 1994 1995 1995 ------- ------- ------- ------- -------- ------------- NETWORK DATA:(6) Buildings connected.... $ 110 $ 161 $ 234 $ 293 $ 380 402 Route miles............ 165 240 335 378 504 4,904 Fiber miles............ 2,956 6,184 10,239 11,227 17,128 17,128 Number of city-based networks in service... 3 4 5 6 9 9 ENHANCED NETWORK SERVIC- ES:(6) Nodes(7)............... -- -- 100 900 2,300 3,800 Cities(8).............. -- -- 37 336 600 900 Switches............... -- -- 4 12 31 52 EMPLOYEES(6)............ 26 49 58 146 287 434
PRO FORMA PRO FORMA (9) AS ADJUSTED(10) DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------------------------------- ------------- --------------- 1991 1992 1993 1994 1995 1995 1995 ------ ------ ------- ------- -------- ------------- --------------- BALANCE SHEET DATA: Cash and cash equiva- lents(11)............. $ 575 $1,775 $27,954 $10,208 $ 50,997 $ 50,997 $322,249 Working capital (defi- cit)(12).............. (949) 8,999 25,712 9,588 70,353 70,103 341,355 Total assets........... 17,577 36,174 61,219 74,086 216,018 233,143 511,172 Long-term debt (including current maturities)(13)....... 9,549 9,647 9,647 10,072 159,307 159,307 339,226 Total stockholders' eq- uity (deficit)........ (7,526) 21,257 45,987 52,033 40,254 57,129 155,239
21 - -------- (1) Gives effect to the acquisitions of FiberNet and EMI (pending) as if they occurred at the beginning of the period presented. Pro forma information excludes the effects of the historical extraordinary item. (2) Net loss per share for the years ended December 31, 1991 and 1992 have been increased by the amount of redeemable preferred stock dividends. Additionally, net loss per share for the year ended December 31, 1991 has been increased to reflect the effects of certain options and warrants issued shortly before ICI's initial public offering in April, 1992 in accordance with a Staff Accounting Bulletin of the Commission. (3) For purposes of calculating the ratio of earnings to fixed charges: (i) earnings consist of loss before income taxes, plus fixed charges excluding capitalized interest and (ii) fixed charges consist of interest expensed and capitalized, plus amortization of deferred financing costs, plus the portion of rent expense under operating leases deemed by the Company to be representative of the interest factor, as well as dividends on redeemable preferred stock. For the years ended December 31, 1991, 1992, 1993, 1994 and 1995 the Company's earnings were insufficient to cover fixed charges by $1,061, $355, $2,288, $3,324 and $19,931, respectively. For the year ended December 31, 1995, the Company's pro forma earnings including $23,634 of interest expense related to the Concurrent Offering were insufficient to cover fixed charges by $46,076. (4) EBITDA consists of earnings before interest, income taxes, depreciation and amortization. In addition the 1995 amount excludes $1,592 related to an extraordinary loss on the early extinguishment of debt. EBITDA is provided since it is a measure commonly used in the telecommunications industry to measure operating performance, asset value and financial leverage. It is presented to enhance the reader's understanding of the Company's operating results and is not intended to represent cash flow for the period indicated. See Consolidated Statements of Cash Flows contained in the Consolidated Financial Statements of the Company and the Notes thereto included elsewhere in this Prospectus. (5) Gives effect to the EMI Acquisition (pending). Certain numbers are estimated based on information provided to the Company by EMI. (6) Based upon Company records. (7) An individual point of origination and termination of data served by the ICI enhanced network. All node numbers are approximate. (8) The number of discrete postal cities to which enhanced services are provided. (9) Gives effect to the EMI Acquisition (pending). (10) Gives effect to (i) the Offering (4.0 million shares at a price of $26.00 per share), the Concurrent Offering and the application of the net proceeds therefrom and (ii) the EMI Acquisition (pending), but does not reflect any costs associated with obtaining consents from the holders of the Existing Senior Notes, including approximately $4.3 million paid to certain of such holders as consideration for such consents. (11) Excludes Restricted Investments held as of December 31, 1995 for the repayment of certain interest on the Existing Senior Notes. (12) Includes $18,854 of Restricted Investments as of December 31, 1995 classified as a current asset. (13) Excludes capital lease obligations at December 31, 1991, 1992, 1993, 1994 and 1995 and December 31, 1995 (pro forma) of $1,512, $2,095, $1,967, $6,455, $6,238 and $6,238, respectively. The Company's unaudited revenues, EBITDA, and loss for the three months ended March 31, 1996 were approximately $13.5 million, $(1.7) million and $(8.9) million, respectively, as compared to $8.7 million, $.9 million and $(1.3) million, respectively, for the three months ended March 31, 1995. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the audited Financial Statements and the Notes thereto appearing elsewhere in this Prospectus. OVERVIEW Since its inception in 1987, the Company has experienced substantial growth. Building from its original base in Florida, ICI is now a provider of integrated telecommunications services to customers that have a presence in its southeastern United States service territory. The Company has nine digital, fiber optic networks in service and one under development in a total of ten metropolitan areas. In addition, the Company's frame relay network serves customers in approximately 600 cities and provides end-to-end connectivity throughout the United States and certain international markets. As its networks and service offerings have expanded, the Company has experienced significant year to year growth in revenues and customers. ICI provides customers with a competitive alternative to the local exchange telephone companies and interexchange carriers in its service territory for a full range of voice and data telecommunications services. ICI's customers include a broad range of businesses and government customers and IXCs. The Company delivers local network services primarily over digital fiber optic telecommunications networks that it either owns or leases. In some circumstances, leasing facilities enables the Company to more rapidly initiate service to customers, reduces the risk of network construction or acquisition and potentially improves cash flow due to the reduction or deferment of capital expenditures. The Company also offers enhanced network services to its customers on an extensive intercity network that connects its customers, either through its own network or through other carriers, to locations throughout the country and internationally. In December 1994, the Company entered the long distance business through the acquisition of Phone One, a facilities-based provider of long distance services. During the fourth quarter of 1995, the sales, customer support and network administration functions of Phone One were integrated into the Company's operating structure. At its inception, ICI provided special access and private line services to interexchange carriers. In 1988, ICI was the first telecommunications service provider in Florida to begin providing special access and private line services to business customers. In 1991, ICI began offering integration services in response to customers' needs and in 1992, ICI introduced its first enhanced network services to provide flexible capacity and highly reliable end-to-end data connectivity for its business and government customers. The Company began offering interexchange long distance service in December 1994, Internet services in 1995 and intends to deploy local switching equipment beginning in 1996 to provide switched access and local exchange service in Florida, and, with requisite approvals, in other portions of its service territory. The pace with which the Company has introduced new service offerings has enabled it to achieve substantial growth, improve its mix of customers and diversify its sources of revenue. The Company believes that business and government customers will continue to account for a substantial share of its revenues over the next several years, because of its ability to offer such customers integrated, cost-effective telecommunications solutions. The Company believes that during the first few years of local exchange competition, the IXCs may enter the market by becoming resellers of the Company's local services. If the IXCs pursue a reseller strategy, the amount of revenue the Company realizes from carriers may increase during this period. In the last five years the Company has achieved positive EBITDA and increased its revenue base substantially. However, as a result of significant investments in network infrastructure and in resources necessary to launch local exchange services and expand enhanced network services, EBITDA has decreased as a percentage of revenue and the Company expects EBITDA to be negative for 1996. The Company believes that this is due to its significant up front expenses related to the development of its networks and leased facilities, the revenue from which is expected to be realized in later periods. The development of the Company's business and the installation and expansion of its networks have resulted in substantial capital expenditures and net losses during this period 23 of its operations. Procurement of rights-of-way, administration and maintenance of facilities, depreciation of network capital expenditures and sales, general and administrative costs will continue to represent a large portion of the Company's expenses during its rapid expansion. In addition, the Company has experienced rapid growth in marketing and selling expenses consistent with the addition of new customers and an increased level of selling and marketing activity. All of the marketing and selling expenses associated with the acquisition of new customers are expensed as they occur even though these customers are expected to generate recurring revenue for the Company for several years. The continued expansion of the Company's networks in anticipation of new customers and the marketing of services to new and existing customers is therefore adversely impacting EBITDA of the Company in the near term. The Company anticipates, but there can be no assurance, that as its customer base grows, incremental revenues will be greater than incremental operating expenses. PLAN OF OPERATION The Company believes that a significant portion of its growth in 1996 will be derived from its enhanced network services. In addition to anticipated internal growth, the EMI Acquisition, if consummated, will substantially increase the geographic coverage of the Company's frame relay network and its customer base. According to industry sources, the market for frame relay services nationwide is projected to be $1.2 billion in 1996; however, there can be no assurance that such amount will be realized or that the assumptions underlying such projection are reliable. In 1997 and beyond, the Company believes that its growth will be balanced among its local network, enhanced network and interexchange services. Based on the Company's analysis of FCC data and its knowledge of the industry, the Company estimates that the market for local exchange and switched access services, which is currently serviced only by the LECs, was $5.0 billion in 1995 in Florida alone. As a result of recent deregulation of the Florida market and the successful negotiation of interconnection co-carrier agreements with each of the three major LECs in Florida, the Company is now positioned to provide local exchange services in a number of Florida's communities. The Company intends to begin offering local exchange services in Florida during the second half of 1996 and in other parts of its service area as requisite approvals are obtained. In order to develop its businesses more rapidly and efficiently utilize its capital resources, ICI plans to use the existing fiber optic infrastructure of other providers in addition to using its existing and planned networks. While the Company will use significant amounts of capital to deploy enhanced data and voice switches on a demand driven basis in selected markets, ICI believes that its substantial existing network capacity should enable it to add new customers and provide additional services that will result in increased revenues with lower incremental costs and, correspondingly, over time improve its EBITDA. For example, selling additional services, such as local exchange services, to existing or new customers allows the Company to utilize unused portions of the capacity inherent in its existing fiber optic networks. This operating leverage increases the utilization of the network with limited additional capital expenditures. The Company's strategy to offer a full complement of telecommunications services is designed to enable the Company to take advantage of the operating leverage of its networks. RECENT STRATEGIC DEVELOPMENTS EMI Acquisition. On February 20, 1996, the Company entered into an agreement to purchase the telecommunications division of EMI. EMI's telecommunications division, headquartered in Syracuse, New York, is a provider of frame relay based network services and interexchange private line services primarily in the northeastern United States. For the past several years, the Company has utilized EMI's networks for termination of enhanced network services traffic in EMI's territory. EMI operates owned and leased microwave and fiber optic digital network capacity in New York, Massachusetts, Vermont, Rhode Island, Connecticut, New Jersey, Pennsylvania, Maryland and the District of Columbia and maintains POPs in most major cities in these states. The consummation of the EMI Acquisition would allow ICI to (i) expand its customer base and increase its exposure to additional interregional customers, (ii) cross sell ICI's long distance and local exchange services into this new base of customers and (iii) reduce costs by eliminating overlapping facilities, removing duplicate NNIs and creating economies of scale. 24 Regulation. The 1996 Act, which was signed into law on February 8, 1996, effected plenary changes in regulation at both the federal and state levels that affect virtually every segment of the telecommunications industry. The 1996 Act greatly expands the FCC's collocation requirements, allowing companies such as ICI to collocate their equipment with the LECs and requiring the LECs and other competitors to reciprocally compensate each other for terminating traffic on each other's networks. In addition, the 1996 Act frees the RBOCs from the judicial orders that prohibited their provision of interLATA services. Specifically, the Act permits RBOCs to provide long distance services outside of their local service regions immediately, and permits them to provide in-region interLATA service upon demonstrating to the FCC and state regulatory commissions that they have adhered to the FCC's interconnection regulations. As a result of these provisions of the 1996 Act, the Company will gain access to an expanded customer base, and will be able to realize a reduction in its costs of interconnection. At the same time, the 1996 Act also makes competitive entry more attractive to RBOCs, other LECs, interexchange carriers and other companies, and likely will increase the level of competition that the Company faces. See "Business--Government Regulation" and "Business--Competition." Interconnection Co-Carrier Agreements. In order to provide expanded end-to- end connectivity and interoperability in Florida, ICI has entered into interconnection co-carrier agreements with BellSouth, GTE and Sprint-United, which provide for reciprocal rights to terminate traffic on each other's networks. The Company expects to enter into similar agreements with LECs cable television companies, utility companies and other competitive local exchange providers in Florida and other states. REVENUE AND CUSTOMER BASE ANALYSIS Since the Company's founding in 1987, ICI has continually introduced new services. Due to these efforts, ICI's customer and revenue base has expanded substantially in recent years. The Company believes that the continued aggressive expansion of its enhanced network services, the proposed acquisition of EMI and the introduction of local exchange services will accelerate the diversification of the Company's customer and revenue base. The Company believes the expansion of the Company's customer base and the diversification of its revenue sources have (i) reduced the Company's percentage of revenue associated with the more price sensitive services to IXCs, (ii) lowered the Company's reliance on any one customer and (iii) increased the total addressable market for the Company's services. The table set forth below provides an analysis of the Company's customer and revenue base. REVENUE AND CUSTOMER BASE ANALYSIS
PRO FORMA(1) ------------ YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, --------------------------- ------------ 1993 1994 1995 1995 -------- -------- ------- ------------ Customer revenue: Non-IXCs.......................... 59% 77% 90% 95% IXCs.............................. 41 23 10 5 -------- -------- ------- ----- Total........................... 100% 100% 100% 100% ======== ======== ======= ===== Number of customers served (at end of period)(2)...................... 230 8,148 9,530 9,930 Revenue sources: Local network services............ 84% 57% 28% 26% Enhanced network services......... 4 16 18 44 Interexchange services............ 0 9 49 23 System integration................ 12 18 5 7 -------- -------- ------- ----- 100% 100% 100% 100% ======== ======== ======= =====
- -------- (1) Gives effect to the acquisition of FiberNet and the EMI Acquisition (pending) as if they had occurred at the beginning of the period presented. (2) Excludes long distance customers for whom billings during December 1995 were less than $5.00. 25 RESULTS OF OPERATIONS The following table presents, for the periods indicated, certain information derived from the Consolidated Statements of Operations of the Company and the Unaudited Pro Forma Condensed Consolidated Financial Statements expressed in percentages of revenue:
PRO FORMA(1) YEAR ENDED DECEMBER 31, YEAR ENDED --------------------------- DECEMBER 31, 1993 1994 1995 1995 ------- ------- ------- ------------ Revenue............................ 100.0% 100.0% 100.0% 100.0 % Facilities administration and main- tenance and line cost............. 34.3 37.8 59.5 76.6 Selling, general and administra- tive.............................. 46.9 44.9 38.8 22.4 Depreciation and amortization...... 36.4 36.0 26.4 15.7 ------- ------- ------- ------ Operating loss..................... (17.6) (18.7) (24.7) (14.7) Interest expense................... (10.2) (8.5) (35.6) (16.9) Interest and other income.......... 2.8 5.7 10.5 5.0 Income tax benefit................. -- -- 0.2 0.1 ------- ------- ------- ------ Loss before extraordinary item..... (25.0) (21.5) (49.6) (26.5)% ====== Extraordinary loss on early extin- guishment of debt................. -- -- (4.1) ------- ------- ------- Net loss........................... (25.0)% (21.5)% (53.7)% ======= ======= =======
- -------- (1) Gives effect to the acquisition of FiberNet and the EMI Acquisition (pending) as if they had occurred at the beginning of the period presented. Pro forma information excludes the effects of the historical extraordinary item. 1995 IN COMPARISON WITH 1994 The Company's revenue grew from $14.3 million to $38.6 million or 171% from 1994 to 1995. A substantial portion of the increase in revenue was derived from growth in the Company's enhanced network services, integration services and the contribution of Phone One (interexchange long distance services) for the full year in 1995. The Company acquired all of the outstanding common stock of Phone One on December 2, 1994. The increase in the level of enhanced network services was evidenced by the increase in nodes which grew approximately 155% from approximately 900 at December 31, 1994 to approximately 2,300 at December 31, 1995. The geographic coverage of the Company's networks also grew in 1995 primarily through the acquisition of FiberNet and the expansion of the Company's intercity network. Monthly recurring revenue in the backlog (booked sales that have yet to be installed) at December 31, 1995 was approximately $4.2 million annualized, an approximately 45% increase in the recurring revenue in the backlog from the prior year. From December 31, 1994 to December 31, 1995, the number of fiber miles in the Company's networks increased from 11,227 to 17,128; route miles increased from 378 to 504; and the number of customers served by ICI (including interexchange long distance customers) increased from 8,148 to 9,530. The Company's interexchange long distance revenues were $18.9 million in 1995. Operating expense in total increased by 184% from $16.9 million for 1994 to $48.2 million in 1995, a $31.3 million increase. Approximately $20.5 million of the increase was attributable to the inclusion of operating expenses relating to the Company's interexchange long distance services. Approximately $2.1 million of the increase was attributable to the inclusion of FiberNet's operating expenses. The operating results of FiberNet have been included in the consolidated results since March 1, 1995. The balance of the increase was consistent with the significant expansion of the Company's owned and leased networks and equipment sales to customers. As a result, the Company incurred a net loss of $20.7 million for 1995, as compared to a net loss of $3.1 million in 1994. Facilities administration and maintenance and line costs increased by 326% from $5.4 million in 1994 to $23.0 million in 1995, a $17.6 million increase. Approximately $13.3 million of the increase is due to inclusion of the operating results of the Company's interexchange long distance services. In addition, increases in 26 maintenance expense due to network expansion, payroll expense due to hiring additional engineering staff and cost of goods sold related to equipment sold to customers contributed to the change. Selling, general, and administrative expense increased by 134% from $6.4 million in 1994 to $15.0 million in 1995, an $8.6 million increase. Approximately $5.2 million of the increase is due to the inclusion of the operating results of the Company's interexchange long distance services and $.3 million is due to the inclusion of FiberNet's operating results. The remaining change was primarily due to increases in sales commissions as a result of increases in sales bookings, accounting, marketing and management information systems staff, and increased property taxes relating to network expansion and enhancements. In addition, the Company expended additional resources by increasing the number and skill level of its sales and sales support staff. Recovery of these additional expenditures typically is recognized in future periods. Depreciation and amortization expense increased by 99% from $5.1 million in 1994 to $10.2 million in 1995, an increase of $5.1 million. These increases are directly related to the $34.9 million and $18.3 million of telecommunications equipment additions (including capital leases) in 1995 and 1994, respectively, relating to ongoing network construction and expansion and increases in the amortization of intangibles associated with the acquisitions of Phone One and FiberNet. Interest and other income increased 402% from $0.8 million in 1994 to $4.1 million in 1995, a $3.3 million increase, as a result of interest earned on the cash available from the proceeds of the offering of the Existing Senior Notes which were received in June 1995. Interest expense increased by 1029% from $1.2 million in 1994 to $13.8 million in 1995, an increase of $12.6 million. The increase is primarily due to the interest incurred on the Existing Senior Notes. Extraordinary loss of $1.6 million was incurred which consisted of $1.2 million in prepayment penalties relating to certain indebtedness which was repaid from the proceeds of the offering of the Existing Senior Notes and the write off of the unamortized deferred financing costs associated with the indebtedness repaid. EBITDA decreased by $1.8 million or 74% from $2.5 million in 1994 to $0.6 million in 1995. As a percent of revenue, 1995 and 1994 EBITDA were approximately 2% and 17%, respectively. This decline was the result of the inclusion of a full year of revenues and expenses relating to interexchange long distance services which have a lower operating margin than the Company's other services, the incurrence of additional growth oriented expenses (such as increases in sales and support staff and market development costs) prior to realizing revenues associated with these expenditures and the Company's introduction of switched access transport services to IXCs. 1994 IN COMPARISON WITH 1993 The Company's revenue grew from $8.3 million to $14.3 million or 72% from 1993 to 1994. A substantial portion of the increase in revenue was derived from growth in the Company's enhanced network services, integration services and the contribution of Phone One for the month of December 1994. The increase in the level of enhanced network services was evidenced by the increase in nodes which grew approximately 800% from approximately 100 at December 31, 1993 to approximately 900 at December 31, 1994. Partially as a result of the increase in the number of customer locations utilizing the Company's enhanced network services, there was also a significant increase in the level of revenue generated from integration services. Monthly recurring revenue in the backlog (booked sales that have yet to be installed) at December 31, 1994 was approximately $0.2 million or $2.9 million annualized, nearly double the recurring revenue in the backlog from the prior year. From December 31, 1993 to December 31, 1994, the number of fiber miles in the Company's networks increased from 10,239 to 11,227; route miles increased from 335 to 378; and the number of customers served by ICI increased from 230 to 345 (excluding interexchange long distance customers) or 8,148 (including interexchange long distance customers). The Company also began offering international enhanced network services to customers in 1994. 27 Operating expense in total increased by 74% from $9.8 million in 1993 to $16.9 million in 1994, a $7.1 million increase. This increase was consistent with the significant expansion of the Company's owned and leased networks, equipment sales to customers and the write-off of approximately $0.2 million in expenses related to strategic investor activities. As a result, the Company incurred a net loss of $3.1 million for 1994, as compared to a net loss of $2.1 million in 1993. Operating expenses for 1994 include $1.4 million of expenses related to the operations of Phone One for one month. Facilities administration and maintenance and line costs increased by 90% from $2.8 million in 1993 to $5.4 million in 1994, a $2.6 million increase. The increase is primarily due to significant growth in leased facilities required to support the rapid growth in enhanced network services. A total of $0.9 million of the 1994 increase relates to leased network costs associated with the operations of Phone One for December 1994. In addition, increases in maintenance expense proportionate to network expansion, payroll expense due to hiring additional engineering staff and cost of goods sold related to equipment sold to customers contributed to the change. Selling, general, and administrative expense increased by 65% from $3.9 million in 1993 to $6.4 million in 1994, a $2.5 million increase. The change was primarily due to increases in sales commissions as a result of proportionate increases in sales bookings, accounting and management information systems staff, and increased property taxes relating to network expansion and enhancements. In addition, the Company expended additional resources by increasing the number and skill level of its sales, sales support and engineering staff. Selling, general, and administrative expenses incurred by the Company and related to Phone One in 1994 totaled $0.3 million. Depreciation and amortization expense increased by 70% from $3.0 million in 1993 to $5.1 million in 1994, an increase of $2.1 million. These increases were directly related to the $18.3 million of 1994 telecommunications equipment additions related to ongoing network construction and expansion. Interest and other income increased 251% from $0.2 million in 1993 to $0.8 million in 1994, a $0.6 million increase, as a result of the full year's effect of investing the funds received from the Company's November 1993 public offering of common stock. Interest expense increased by 44% from $0.8 million in 1993 to $1.2 million in 1994, an increase of $0.4 million. The increase is primarily due to the capitalization of a significant fiber lease during 1994. EBITDA increased by $0.9 million or 58% from $1.6 million in 1993 to $2.5 million in 1994. This increase is the result of revenue increasing while the EBITDA margin remained relatively stable. As a percent of revenue, 1994 and 1993 EBITDA were approximately 17% and 19% respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's operations have required substantial capital investment for the purchase of telecommunications equipment and the design, construction and development of the Company's networks. Capital expenditures for the Company were $10.5 million, $13.7 million and $30.0 million in 1993, 1994 and 1995, respectively, excluding capital leases and telecommunications equipment acquired in connection with business acquisitions. The Company expects that it will continue to have substantial capital requirements in connection with the (i) expansion and improvement of the Company's existing networks, (ii) design, construction and development of new networks, (iii) connection of additional buildings and customers to the Company's networks, (iv) purchase of switches necessary for local exchange services and expansion of interexchange services and (v) development of the Company's enhanced network services. The Company has funded a substantial portion of these expenditures primarily through the public sale of debt and equity securities and, to a lesser extent, privately placed debt. From inception to December 31, 1995, the Company has sold or issued an aggregate of approximately $74.2 million of Common Stock, including Common Stock issued in connection with the acquisitions of FiberNet and Phone One, and $160 million in Existing Senior Notes. 28 The Company has produced positive EBITDA in each of the last five years. However, the substantial capital investment required to build the Company's networks has resulted in negative cash flow after investing activities from operations in the five year period. This negative cash flow after investing activities is a result of the requirement to build a substantial portion of the network in anticipation of connecting revenue generating customers. The Company expects to continue to produce negative cash flow after investing activities for at least the next two years due to expansion activities associated with the development of the Company's networks. Until sufficient cash flow after investing activities is generated from operations, the Company will have to utilize its current capital resources to meet its cash flow requirements. The Company currently estimates that it requires approximately $175.0 million to fund anticipated capital expenditures for 1996 and 1997 and approximately $110.0 million to fund anticipated capital expenditures for 1998. The Company expects that it will have adequate resources to fund its anticipated capital expenditures in 1996, 1997 and a portion of its anticipated capital expenditures in 1998 through the Offering and Concurrent Offering and through internal sources of funds including cash flow from operations. Capital expenditures will be used for the development and expansion of its existing networks and for the development of fiber based networks, owned and leased, in other selected metropolitan areas. In addition, the Company expects to expend capital toward the further development of the Company's enhanced network services and interexchange long distance service offerings. The Company expects to expend substantial amounts to upgrade its existing networks in order to switch traffic within a local service area in those states where it is currently permitted to provide such services. In addition, as any approvals necessary to permit the Company to provide such services in other states are obtained, additional capital may be expended in developing the capacity to provide switched services. If the Company's internal resources are not sufficient to meet capital expenditure requirements and to fund operating losses, the Company may obtain additional funding through the sale of public or private debt and/or equity securities or through securing a bank credit facility. There can be no assurance as to the availability or the terms upon which such financing might be available. Moreover, the Senior Discount Notes and the Existing Senior Notes impose certain restrictions upon the Company's ability to incur additional indebtedness. The Company has from time to time held, and continues to hold, preliminary discussions with (i) potential strategic investors who have expressed an interest in making an investment in or acquiring the Company and (ii) potential joint venture partners looking toward the formation of strategic alliances that would expand the reach of the Company's networks or services without necessarily requiring an additional investment in the Company. In addition to providing additional growth capital, management believes that an alliance with an appropriate strategic investor would provide operating synergy to, and enhance the competitive positions of, both ICI and the investor within the rapidly consolidating telecommunications industry. Potential strategic alliances or acquisitions are also continually being explored by the Company. There can be no assurance that agreements for any of the foregoing will be reached nor does management believe that the consummation of any thereof is necessary to successfully implement its strategic plans. IMPACT OF INFLATION Inflation has not had a significant impact on the Company's operations over the past three years. 29 BUSINESS INDUSTRY HISTORY The present structure of the U.S. telecommunications market resulted largely from the divestiture of the "Bell System" in 1984 (the "Divestiture"). As part of the Divestiture, seven RBOCs were created to offer services in geographically defined areas called LATAs. The RBOCs were separated from the long distance provider, AT&T, resulting in the creation of two distinct industries: local exchange and interexchange (commonly known as long distance). The Divestiture provided for direct, open competition in the long distance segment; however, it did not provide for competition in the local exchange market. Nonetheless, several factors have served to promote competition in the local exchange market, including (i) the LECs' monopoly position and regulated pricing structure, which provided little incentive for the LECs to reduce prices, improve service or upgrade their networks, (ii) customers' desire for an alternative to the LEC monopoly, which desire grew rapidly and was spurred in part by the development of competitive activities in the long distance market and increasing demand for high quality, reliable services, (iii) the advancement of fiber optic and digital electronic technology (such as ATM and SONET), which combined the ability to transmit voice and data at high speeds with greatly increased capacity and reliability as compared to LECs' copper-based networks and (iv) the significant fees, called "access charges," IXCs were required to pay to the LECs for access to the LEC networks. Established in the mid-1980's, "competitive access providers" or "CAPs" were among the first competitors in the local exchange market. CAPs provided non- switched services (i.e., dedicated special access and private line) by installing fiber optic facilities connecting IXCs' POPs within a metropolitan area and, in some cases, connecting customers (primarily large businesses and government agencies) with IXCs. CAPs used the substantial capacity and economies of scale inherent in fiber optic cable to offer service that was generally less expensive and of a higher quality than the LECs. In addition, CAPs offered shorter installation and repair intervals and improved service reliability in comparison to the LECs. At the same time, large numbers of regional and/or national IXCs were formed to compete with AT&T in the interexchange market. These IXCs generally fell into two categories, facilities-based IXC's and non-facilities-based IXCs (i.e., switchless reseller). As CAPs proliferated during the latter part of the 1980's and early 1990's, regulators in some states and at the federal level issued rulings which favored competition and promoted the opening of markets to new entrants. These rulings allowed CAPs to offer a number of new services, including, in certain states, certain local network services. In the late 1980's and early 1990's, CAPs could compete effectively only for dedicated special access and private line services to customers in buildings physically connected to separate, privately owned CAP networks. In the early 1990's, federal regulations permitted CAPs to interconnect their networks with the LEC networks at the LEC central offices. CAPs then had the opportunity to increase significantly the number of customers and markets served without physically expanding their networks. By connecting to the LEC central offices, CAPs were able to use the extensive LEC networks to reach additional customers, thus conserving their own capital while significantly expanding their potential markets. In the summer of 1995, several states began opening their markets to local exchange competition. On February 8, 1996, the Telecommunications Act of 1996 was signed into law. The 1996 Act provides a framework by which all states must allow competition for local exchange services. See "--Government Regulation." The market for telecommunications services in the United States was $158 billion in 1995. 30 THE COMPANY ICI is a rapidly growing provider of integrated telecommunication services. Founded in 1987 as one of the nation's first facilities-based CAPs, the Company currently operates digital, fiber optic networks in nine metropolitan areas and has one network under development. Expanding beyond provision of traditional CAP services, the Company now provides enhanced network services, including frame relay and Internet access services, primarily to business and government customers, in approximately 600 cities nationwide, and is a facilities-based interexchange carrier providing services, to approximately 10,000 customers. ICI intends to begin providing a range of local exchange services in Florida in the second half of 1996 and in other parts of its service territory as requisite approvals are obtained. ICI has continued to increase its customer base and network density in the Southeast and its customers' traffic to locations outside its existing service territory continues to increase. The Company has pursued (and will continue to pursue) attractive opportunities to expand into other geographic markets. The Company's goal is to become the single source provider of comprehensive telecommunications services to its customers. To accomplish this goal, the Company's strategy is to systematically secure a growing portion of a customer's telecommunications business and, over time, through the provision of additional integrated services, increase the customer's reliance on, and sense of partnership with, the Company. In addition, with the advent of state and federal laws mandating local exchange competition, significant opportunities exist for the Company to increase its market share and reach new market segments by allowing other parties, including IXCs, to resell ICI's local exchange services, when available. ICI's strategy is designed to build a base of recurring revenues and to take advantage of the increasing requirements of business and government customers for more effective and efficient solutions to their telecommunications needs. These customers require maximum reliability, high quality service, broad geographic coverage (including end-to-end connectivity), solutions-oriented customer service and the timely introduction of innovative services. These customers also demand that services be delivered in a cost-effective manner and, preferably, from a single source. The Company is well positioned to satisfy such customer requirements due to (i) the successful negotiation of interconnection co-carrier agreements for Florida with BellSouth, GTE and Sprint-United and the implementation of NNIs for frame relay data transmission with each of such carriers, (ii) a specialized sales and service approach employing engineering and sales professionals who design and implement customized, cost-effective telecommunications solutions, (iii) the ongoing development and integration of new telecommunications services and (iv) the strategic deployment of voice and data switches and digital fiber optic networks designed with redundancy and diversity. In December 1994, the Company acquired Phone One, a facilities-based interexchange carrier providing services to customers primarily located in Florida and Georgia. In July 1995, the Company consummated its acquisition of FiberNet thereby expanding its fiber optic networks into four additional metropolitan areas. On February 20, 1996, the Company entered into an agreement to purchase the telecommunications division of EMI, a wholly-owned subsidiary of Newhouse Broadcasting Corporation, for 937,500 shares of ICI Common Stock. EMI's telecommunications division, headquartered in Syracuse, New York, is a provider of frame relay based network services and interexchange private line services primarily over digital microwave networks in the northeastern United States. For the year ended December 31, 1995, EMI's revenues were approximately $43 million and the combined pro forma revenues of ICI and EMI were approximately $82 million. Although ICI believes the EMI Acquisition will be consummated, there can be no assurance that the conditions to the closing of such transaction will be satisfied and that the transaction will be consummated. The FiberNet and Phone One acquisitions have allowed (and the pending EMI Acquisition will allow) ICI to (i) expand its customer base and increase its exposure to additional interregional customers, (ii) introduce additional business customers to all of the Company's service offerings, (iii) add long distance to its portfolio of service offerings, (iv) reduce costs by eliminating overlapping facilities and removing duplicate NNIs and (v) create synergies between long distance and local service offerings such as economies of scale, usage sensitive billing capabilities and cross- selling opportunities. 31 Subject to receipt by the Company of the requisite approvals, the Company intends to deploy switching equipment to provide local exchange and switched access services in each of its principal markets. These new switches will also augment the Company's interexchange services. The Company recently began to deploy such switching equipment in Florida and intends to deploy four switches in Florida during 1996. In addition, the Company is the first alternative local exchange carrier to enter into interconnection co-carrier agreements for Florida with each of BellSouth, GTE and Sprint-United, the three major providers of local exchange services in Florida, which provide for reciprocal rights to terminate traffic on each other's networks. Based upon FCC data and the Company's knowledge of the industry, the Company estimates that the market for local network services in 1995 was $5.0 billion in Florida, and $95 billion in the United States, substantially all of which is currently served by LECs. The Company has nine digital, fiber optic networks in service and one under development in a total of ten metropolitan areas. As of December 31, 1995, this infrastructure was comprised of 17,128 fiber miles and 504 route miles and was connected to 380 buildings. ICI continues to expand these networks and has identified expansion opportunities in other selected markets. This expansion should enable the Company to (i) achieve economies of scale in the management of its networks as well as the marketing and sales of its services, including local exchange services, (ii) more effectively service customers that have a presence in multiple metropolitan areas and (iii) reach a significant number of new customers. The Company has also undertaken a major expansion of its intercity network to satisfy the growing demands for enhanced network services, including frame relay networking services, ATM and Internet access. As a result, the Company had approximately 2,300 nodes, serving customer locations in 600 cities as of December 31, 1995 (not including the approximately 1,500 nodes in approximately 400 cities served by EMI), as compared to approximately 900 nodes, serving customer locations in 336 cities as of December 31, 1994. Enhanced network services, which are currently provided primarily on the Company's frame relay network, are specialized interexchange services offered by the Company for customers that need to transport large amounts of data among multiple locations. To address the growing demand for end-to-end connectivity and interoperability throughout the United States, in 1994, ICI created, in conjunction with EMI and three other regional telecommunications companies, the UniSPAN(C) consortium. This consortium, along with ICI's relationship with certain other carriers, allows the Company to terminate traffic both nationally and internationally utilizing other companies' networks and provides a flow of traffic onto the Company's networks. In addition, to further increase efficient access to a greater customer base, ICI and EMI have successfully established approximately 100 NNIs which interconnect their frame relay networks to those of BellSouth, Bell Atlantic Telephone Companies, Sprint-United, NYNEX Corporation, Ameritech Operating Companies, Southern New England Telephone Company, GTE and other carriers. According to industry sources, the frame relay services market is projected to grow at the rate of 84% per year through 1997 from its 1993 base of $144 million; however, there can be no assurance that such market growth will be realized or that the assumptions underlying such projections are reliable. ICI was incorporated in the State of Delaware on November 9, 1987, as the successor to a Florida corporation that was founded in 1986. The Company's principal offices are located at 3625 Queen Palm Drive, Tampa, Florida 33619, and its telephone number is (813) 621-0011. CORPORATE STRATEGY The Company's goals, and its strategy for achieving them, distinguish the Company from many of its competitors. The Company's goal is to be a provider of a comprehensive set of integrated telecommunications services to a broad range of business and government customers, both directly and through resellers. The Company has developed the staff and knowledge-based skills required to market its services directly to business and government customers, as well as to resellers. The Company believes this strategy reduces the risk that accompanies the dependence on a few large customers. In addition, the Company has a substantial base of customers to whom it can market local exchange services when introduced. The significant capacity inherent in the Company's networks also provides the Company with the opportunity to offer additional services without a 32 commensurate increase in operating expenses. ICI provides its customers with a specialized sales and service approach that enhances the cost effectiveness, value and reliability of the Company's service offerings to its customers. In order to become the single source provider of comprehensive telecommunications services to its customers, ICI has developed operating strategies designed to attract and retain customers, optimize the operational and cost structure of its networks and achieve desired growth. Below are the important components of these strategies. Customer Strategy ----------------- Provide Single-Source Telecommunications Services. The Company's service portfolio currently includes: high capacity access and private line services, high speed data networking (i.e., frame relay and ATM), Internet services, interexchange long distance services, switched access transport and integration services. The Company intends to continue to expand its service offerings to customers, including providing local exchange services beginning in 1996, in order to become a single-source provider of telecommunications services. Recent state and federal legislation has opened the local exchange services market to competition which until recently could only be provided by the LECs. See "Business--Government Regulation." A single-source capability provides significant advantages for the customer and for the Company. Not only does this capability address customers' complex requirements associated with integration of diverse networks and technologies at various locations, but it also reduces customers' administrative burdens associated with service charges, billing, network monitoring, implementation, coordination and maintenance. The Company also believes that expanding its service offerings will be advantageous operationally as the Company is able to introduce additional services through existing networks and customer connections thereby leveraging the significant capacity inherent in its digital networks. Focus on Business and Government Customers. The Company's portfolio of service offerings, customer service approach, highly reliable networks, broad geographic coverage and integration capabilities are well-suited to serve the demands of telecommunications-intensive business and government customers. The Company's existing business customer base includes firms in the retail, financial services, grocery, manufacturing and other industry segments. The Company has entered into a contract with the State of Florida to provide frame relay based network services for the State Division of Communications. These services will be deployed statewide and utilized by many of the State's agencies. In addition, upon the consummation of the EMI Acquisition, the Company would be a provider of telecommunications services to the State of New York's Empire Net which connects numerous agencies within the State. The Company believes that its success in providing these services to government agencies will be replicated in other states within the Company's service territory. Develop IXC and Value-Added Reseller Relationships. Recent changes in state and federal regulation have accelerated ICI's ability to deliver local exchange services and have provided LECs with incentives to foster local exchange competition. In addition, as the IXCs enter the local exchange business, the Company believes that they will seek to gain access to the local exchange services market by either developing local network capacity or by purchasing such capacity from alternative service providers. The Company believes that these developments are likely to make ICI an attractive choice for joint ventures and preferred vendor arrangements with the IXCs, LECs and other telecommunications related companies. Such arrangements would benefit the Company by enabling ICI to more rapidly recover its capital investment in switches by increasing the traffic through its networks. These arrangements should enable ICI to achieve greater market share and reach new market segments more rapidly than it could otherwise. The Company intends to solicit IXCs, out of region LECs, cable companies and other value added resellers to resell its local exchange services, when available. Maintain and Develop Long-Term Relationships. By providing customized telecommunications solutions to its customers, the Company develops a sense of partnership with its customers. As a result, the Company believes that a growing portion of its revenue base will be associated with long-term customer relationships. 33 Provide Cost-Effective Service Offerings. ICI has developed a number of innovative services designed to provide cost-effective telecommunications solutions to its customers. Each of the Company's individually packaged services is competitively priced and when integrated into a comprehensive telecommunications package provides significant value over comparable LEC and IXC service offerings. The Company believes that the introduction of its services at competitive market rates has stimulated demand from small to medium-sized customers thereby broadening the market for ICI's services. Expand Solutions-Oriented Sales Effort. The Company has rapidly expanded and intends to continue to expand the utilization of its direct sales and support team consisting of engineering and sales professionals to (i) increase the level of integration between the Company's and the customer's operations thus making the customer more reliant on the Company's services and (ii) broaden the services that can be offered by the Company. During 1995, ICI increased its sales representatives from 39 to 57. The Company believes its solutions- oriented sales approach enables the Company to provide customers with effective customized solutions to their telecommunications requirements. Network Strategy ---------------- Control Franchise Points of the Networks. The Company focuses its capital deployment on the segments of its networks that the Company believes will provide it with the highest revenue potential and the greatest long-term competitive advantage. The Company believes that connections to customers and building entries represent an important strategic component of its networks. These connections provide the Company with the platform to sell a variety of services to existing or potential customers within a building. ICI also believes that the deployment of switching technology and advanced network electronics enables the Company to better configure its networks to provide cost effective and customized solutions to its customers. The ability to offer these types of solutions differentiates ICI from commodity transport service providers. Extend Coverage to Provide End-to-End Connectivity. The Company has entered into interconnection co-carrier agreements with the large LECs in Florida, which allow the Company access to substantially all business and government telephones in Florida. The Company anticipates entering into similar arrangements with LECs in other markets. To better serve its end user customers, the Company has also interconnected its frame relay network to those of BellSouth, GTE, Bell Atlantic and several other carriers, thereby substantially expanding the reach of its networks. Upon consummation of the EMI Acquisition, ICI would provide originating and terminating transport services in 45 states and maintain POPs for interexchange and enhanced network services in most major cities in these states. Deploy Capital Cost Effectively on a Demand Driven Basis. The increasing geographic coverage of the Company's services and the growing availability of leased capacity at competitive rates have led the Company to lease network capacity in various areas prior to, or in lieu of, building additional capacity. Utilizing leased facilities enables the Company to (i) meet customers' needs more rapidly, (ii) improve the utilization of ICI's existing networks, (iii) add revenue producing customers before building networks thereby reducing the risks associated with network construction and (iv) focus its capital expenditures in geographic areas where network construction or acquisition will provide a competitive advantage. Growth Strategy --------------- Accelerate Internal Growth. By focusing on business and government customers and maintaining high-quality and cost-effective services, the Company generated significant internal growth. The Company believes that its customer and network strategies will continue to enable ICI to expand its services and markets, increase its revenue base and effectively compete in a dynamic marketplace. Selectively Acquire Existing Networks and Services. Over the past few years, a portion of the Company's growth has been accomplished through acquisitions (such as FiberNet, Phone One and EMI (pending)) and joint ventures or selling relationships (such as those ICI has with its UniSPAN(C) partners). The Company continues to 34 examine from time to time various acquisition and joint venture proposals to accelerate its rate of growth. In addition to the usual financial considerations, ICI assesses each opportunity to determine if either: (i) current network traffic into and out of the geographic areas served by the target company warrant developing a presence in those geographic areas or (ii) the target company offers services consistent with the Company's service portfolio which are not currently offered by ICI utilizing technology compatible with that utilized by ICI. Furthermore, ICI carefully evaluates the target company's corporate culture to assess its ability to integrate the target company's personnel and systems into the Company. While management does not believe that acquisitions are necessary to achieve the Company's strategic goals, strategic alliances with or acquisitions of appropriate companies may accelerate achievement of those goals by creating operating synergies and more rapid expansion of the Company's networks or services. Although the Company considers potential acquisitions from time to time, other than the EMI Acquisition, no agreement or agreement in principle has been reached for any acquisition. SERVICES PROVIDED AND MARKET With the commencement of its operations in Orlando, Florida, the Company became one of the first CAPs in the United States and has developed into an integrated telecommunications services provider in its territory. The Company currently provides a broad array of local and long distance telecommunications services and, as requisite approvals are obtained, these services will be expanded into additional markets. See "Risk Factors--Uncertainty of Future Regulation" and "--Government Regulation." Below is a summary of services the Company currently provides or (where indicated below) intends to provide: Enhanced Network Services. Digital data network services provided on ICI's network platform, which currently utilizes frame relay technology, including flexible bandwidth connectivity and multi-protocol support. Internet Services. Access to the Internet and hosted applications including world wide web page, e-mail and file transfer protocol (FTP) support. Local Exchange Services. Switched services providing local telephone service, including local dial tone service, to business and government customers or to carriers and other value-added resellers (beginning in the second half of 1996). Long Distance Services. Switching and transport, billed on a minutes of use basis, of interexchange traffic including voice and data. Switched Access Services. Switched services, generally offered to IXCs billed on a minutes of use basis, that connect a customer to a POP of an IXC (beginning in the second half of 1996). Special Access and Private Line Services. Non-switched dedicated connections including high capacity interconnections between (i) the POPs of an IXC, (ii) the POPs of different IXCs, (iii) the POPs of an IXC and LEC end offices, (iv) large customers and their selected IXCs and (v) different locations of particular customers. These services are billed at a flat, non-usage sensitive, monthly rate. Integration Services. Provision and customized configuration of customer premise equipment (CPE), provision of network equipment and related support, application design support and other consulting services. The following table sets forth the Company's estimates, based upon an analysis of industry sources including industry projections, and FCC data, of the market size nationally of the services described above. Only a limited amount of direct information is currently available and therefore a significant portion of the information set forth below is based upon estimates and assumptions made by the Company. The Company believes that its estimates are based upon reliable information and that its assumptions are reasonable. There can be no assurance, however, that the estimates will not vary from the actual market data and that these variances will not be substantial. The size of the market for these services is not intended to provide an indication of the Company's total addressable market or the revenue potential for the Company's services. ICI has obtained all certifications 35 necessary to permit the Company to provide local exchange service in the State of Florida and is in the process of obtaining the necessary certifications in seven other states where the Company operates or plans to operate. In addition, the Company's ability to offer services in Florida and in other states is limited by the size and coverage of the Company's networks and competitive factors. Investors should not place undue reliance on this information in making an investment decision with respect to the securities offered hereby.
1995 COMPANY ESTIMATES (DOLLARS IN MILLIONS) U.S. ---------------------- LOCAL NETWORK SERVICES Special Access and Private Line Services............... $ 7,400 Switched Access Services............................... 18,900 Local Exchange Services(1)............................. 45,400 Other(2)............................................... 22,900 -------- Total Local Network Services......................... 94,600 ENHANCED NETWORK SERVICES................................ 700 INTEREXCHANGE SERVICES................................... 62,700 -------- Total Additional Services............................ 63,400 -------- TOTAL MARKET SIZE........................................ $158,000 ========
- -------- (1)The Company is currently permitted to offer these services in Florida and has applied for certification to offer these services in Alabama, Georgia, Louisiana, Mississippi, North Carolina, Ohio and South Carolina. (2)Other includes revenue from pay phones, billing services and intraLATA calling services. ICI's services generally fall into three categories: (i) local network services, which include local exchange services, special and switched access services and local private line services, (ii) enhanced network services, which include frame relay based data transport, ATM and Internet services and (iii) interexchange (long distance) services. The Company's local network services consist of traditional CAP services, which the Company has been offering since 1987, and will include switched access and local exchange service, which the Company plans to begin offering in 1996. The Company provides customers traditional CAP services either by building network facilities or leasing extended network facilities to the customer's premises. In the markets where the Company has digital, fiber optic networks, the addition of local exchange services allows the Company to increase its revenue generating product mix with minimal additional capital costs and allows a more integrated service to be offered to the customer. The initial circuit used to reach the customer establishes a platform that can be utilized to offer additional services. Due to the significant bandwidth inherent in fiber optic cable, a single connection can support a large number of service types. The Company has consistently built its base of local network service customers by offering highly reliable, high quality services that compete primarily with the LECs. In 1995, local network services accounted for approximately 28% of the Company's total revenues. The Company believes that the market for these services will continue to exhibit growth through the introduction of switched access services, expansion of networks within existing markets, addition of new markets, and through increased penetration of existing customers in these markets with new incremental services. Local exchange services, which the Company expects will continue to open for competition around the country as the telecommunications industry deregulation continues, will offer large, new opportunities to utilize the Company's existing networks and customer connections. The Company's services and networks position the Company to take advantage of this deregulation. Enhanced network services consist of (a) interexchange data networks utilizing frame relay technology, (b) application services, such as Internet, which utilize the frame relay network and (c) interexchange private line services. Enhanced network services enable customers to economically and securely transmit large volumes of data typically sent in large bursts from one site to another. Previously, customers had to utilize low speed dedicated private lines or dial up circuits for interconnecting remote LANs and other customer locations. These 36 methods had numerous disadvantages including (i) low transmission speeds, (ii) systems that required the utilization of complementary protocols and line speeds which significantly increased the cost of implementing networks, (iii) limited security placing customers' entire networks at risk to tampering from outside sources and (iv) high costs due to the necessity to pay for a full time dedicated line despite infrequent use. Enhanced network services are utilized for LAN interconnection, remote site, point of sale and branch office communications solutions. The typical ICI customer for enhanced network services has multiple business locations, many of which are in the Southeast, and requires communication for one or more data applications among these locations. The customer may also have a number of locations served by ICI's fiber optic networks; however, provision of enhanced network services is not dependent on the provision of local network services at any specific location. All of the customers' locations, whether domestic or international, are monitored by the Company and can be served through the Company's own operations or through the use of partner networks (e.g., UniSPAN(C)). In 1995, the Company's enhanced network services accounted for approximately 18% of the Company's total revenue. The market for enhanced network services, according to industry sources, is expected to grow at a rapid pace over the next several years. There can be no assurance, however, that such market growth will be realized or that the assumptions underlying such projections are reliable. Interexchange long distance services have been offered by the Company since December 1994. Interexchange long distance services include inbound (800) service, outbound service and calling card telephone service. The Company currently provides interLATA long distance services in Florida and Georgia and interstate long distance services nationwide. The Company intends to expand its service offerings to include intraLATA long distance services as regulation permits and interLATA long distance services in additional states. The enhanced network services and the interexchange services provided by the Company are supported by a common backbone network allowing ICI to offer interexchange private line services at a competitive price. See "--Network." The Company's integration services are applicable to all three categories of services described above and are made available to end user and carrier customers. A team of sales professionals and engineers will develop specialized solutions for a customer's specific telecommunications needs. Some of these integration services include the sale and installation of third party equipment to handle certain telecommunications and monitoring functions and the development of private networks. The Company believes that such services increase the level of linkage between the Company's and the customer's operations thereby increasing the customer's reliance on the Company. The Company plans to continue to expand its domestic geographic reach by acquiring and integrating high quality value added companies, such as EMI. In addition, the Company, through the pursuit of strategic alliances, plans to expand its ability to originate and terminate voice and data traffic in certain Latin American markets during 1996. ICI believes these markets are important to its business because, not only is there a significant community of interest between many of these countries and the cities of Miami and Tampa as a result of the large Spanish speaking populations in these cities, but there are also a number of businesses that have operations in both Latin America and Florida. In addition, Miami has become an important center of commerce for Latin American businesses. SALES, MARKETING AND SERVICE DELIVERY ICI's marketing activities are primarily directed to business and government customers with a presence in the Company's service territory. The Company's customers include large corporations, financial services companies, government departments and agencies, and academic, scientific and other major institutions as well as small and medium sized businesses and IXCs. 37 The Company's sales and marketing approach is to build long-term business relationships with its customers, with the intent of becoming the single source provider of all of their telecommunications services. In an effort to leverage its recent success in obtaining government contracts, the Company has created a sales group whose focus is the marketing of ICI's telecommunications services to government departments and agencies. More generally, the ICI sales force includes specialized resources who focus on sales to wholesale, retail and alternate channel (agents and value added resellers) consumers of the Company's telecommunications services. The Company's sales staff works to gain a better understanding of the customer's operations in order to develop innovative application specific solutions to each customer's needs. The sales staff also works with customers that have large bases of services with the LEC to convert these to services provided by ICI. Sales personnel locate potential business customers by several methods, including customer referral, market research, cold calling and other networking alliances. Enhanced network services, like all other ICI services, are sold through the Company's existing sales force, supported by sales engineers, and often in cooperation with agents and value added resellers (independent providers of communications hardware to customers), and other business associates. This approach enables the Company to (i) emphasize the applications solutions aspects of enhanced network services and (ii) utilize the expertise and resources of other vendors. The Company intends to expand its sales and engineering support staff and other technical specialists in order to meet the growing demand for enhanced network services. Since these services are also sold to extended network customers of the Company, this sales effort offers the Company a means of expanding its network. See "--Network." The Company's service delivery staff is primarily responsible for coordinating service and installation activities. Delivery service activities include surveying the site to assess ambient conditions and power and space requirements, as well as coordinating installation dates and equipment delivery and testing. ICI's customer service and technical staff plans, engineers, monitors and maintains the integrity, quality and availability of the Company's networks. ICI's customer service and technical staff are available to customers 24 hours every day. To support all of its network based services, the Company has implemented an automated ordering, provisioning and billing system similar to that used by the LECs. This automated system makes it easy for the Company's IXC customers to track their orders with ICI, and similarly allows ICI to track its orders with the LECs. ICI has also implemented an integrated network management system which enhances the Company's ability to monitor, test, track trouble and dispatch repair resources. This system monitors the performance of ICI's networks 24 hours every day. NETWORK The Company has deployed its network infrastructure selecting the most economical alternative of constructing or leasing facilities or a combination thereof. The Company generally chooses to own facilities where (i) there is no fiber optic network alternative and the Company can be the incumbent network provider, (ii) ownership creates strategic value for the Company, (iii) large concentrations of telecommunications traffic are accessible to justify network construction and (iv) network construction can create significant barriers to entry for subsequent competitors who may wish to enter the Company's markets. In addition to the "build" vs. "lease" decision for network deployment, the Company also considers potential network acquisitions from time to time (e.g. the acquisition of FiberNet and the pending EMI Acquisition). The Company believes that acquisitions will generally provide it with (i) immediate access to incremental customers, (ii) reduction of network construction and implementation risks, (iii) elimination of an incumbent competitor, (iv) immediate access to additional qualified management, sales and technical personnel and (v) a network platform for the provision of incremental value added services. In those markets where ICI chooses to deploy broadband fiber networks, the Company's strategy is to first develop the IXC "carrier ring" portion of its network, a high capacity network designed to be accessible to all the major long distance carriers in the area. This portion of the network allows the Company to provide services 38 to these long distance carriers, initially, and over time to connect business and government customers to such long distance carriers. Second, the Company designs a larger "backbone ring" extending from the carrier ring, with a view toward making the network accessible to the largest concentration of telecommunications-intensive, business and government customers in the area. Hubs are strategically located on the backbone rings to allow for the collection and distribution of telecommunications traffic onto and off of the backbone ring. Third, the Company concentrates its sales and marketing efforts on adding business and government customers located on or very near its backbone network and hub locations. Once ICI determines that there is sufficient customer demand in a particular area, it extends "distribution rings" from the backbone ring to reach specific business customers in that area. ICI's city-based networks are comprised of fiber optic cables, integrated switching facilities, advanced electronics, data switching equipment (e.g. frame relay), transmission equipment and associated wiring and equipment. By virtue of its state-of-the-art equipment and ring-like architecture, the Company's networks offer electronic redundancy and diverse access routing. Through automatic protection switching, if any electrical component or fiber optic strand fails, the signal is instantaneously switched to a "hot standby" component or fiber. Since network outages and transmission errors can be very disruptive and costly to long distance carriers and other customers, consistent reliability is critical to customers. In addition, ICI monitors its networks 24 hours every day. The Company currently has fiber optic networks in service in Orlando, Tampa, Miami, St. Petersburg, Jacksonville, and West Palm Beach, Florida, Cincinnati, Ohio, Raleigh-Durham, North Carolina and Huntsville, Alabama and under development in St. Louis, Missouri. ICI continues to expand these metropolitan area networks and has identified network expansion opportunities in other selected markets. In addition, the Company has undertaken a significant network expansion to satisfy the demands of the Company's market driven growth in enhanced network service offerings. The Company has deployed resources, primarily switching equipment, to develop an extensive network to provide these data services to customers with multiple locations. Excess capacity on this leased network can be used to provide incremental telecommunications services such as interexchange long distance services. Often, the Company offers these enhanced services in geographic markets where it has not deployed its own fiber optic network by leasing facilities from a variety of entities, including LECs, utilities, IXCs, local governments, cable companies and various transit/highway authorities. With these networks (including EMI), the Company currently serves approximately 500 cities located east of the Mississippi River. These networks and the leased facilities connected to them, comprise the network platform which the Company utilizes to offer its broad array of telecommunications services to its customers. Finally, the Company also has agreements with certain third parties and the carriers in the UniSPAN(C) consortium, to deliver enhanced network services nationwide or internationally through a seamless data network. The Company's telecommunications equipment vendors actively participate in planning and developing electronic equipment for use in ICI's networks. The Company does not believe it is dependent on any single vendor for equipment. Because the Company uses existing telecommunications technology rather than developing it, ICI's research and development expenditures are not material. COMPETITION The Company faces competition in three distinct market segments--local network services (local exchange, special access and private line and switched access services), enhanced network services and interexchange services (traditional long distance services). The Company believes that various legislative initiatives, including the recently enacted 1996 Act, have removed remaining legislative barriers to local exchange competition. While the Company currently competes with AT&T, MCI and others in the interexchange services market, the recent federal legislation permits the RBOCs to provide interexchange services under certain circumstances. If the RBOCs begin to provide such 39 services, they will be in a position to offer single source service similar to that being offered by ICI. In addition, Sprint-United currently offers, and various LECs and IXCs, including BellSouth and GTE, have announced their intent to offer, integrated telecommunication services in areas currently served by ICI. AT&T and MCI have also announced their intent to enter into the local exchange services market. The Company cannot predict the number of competitors that will emerge as a result of any new federal and state regulatory or legislative actions. Competition from integrated telecommunications services provided by the RBOCs, AT&T or MCI could have a material adverse effect on the Company's business. Competition in each of the market segments served by the Company, as well as for systems integration which is common to all market segments, is discussed below. Local Network Services. In each of its geographic markets, the Company faces significant competition for the local network services it offers from RBOCs and other LECs, which currently dominate their local telecommunications markets. These companies all have long-standing relationships with their customers and have financial, personnel and technical resources substantially greater than those of ICI. The Company also faces competition in most markets in which it operates from one or more CAPs operating fiber optic networks. Other local network service providers have operations or are initiating operations within one or more of the Company's service areas. ICI expects MFS Communications Company ("MFS"), MCI, Teleport Communications Group, Inc. ("Teleport"), Jones Lightwave and certain cable television providers, many of which are substantially larger and have substantially greater financial resources than the Company, to enter some or all of the Florida markets that the Company presently serves. At least two of these competitors, MFS and Teleport, have entered or announced plans to enter a number of ICI's service areas. ICI also understands that other entities have indicated their desire to enter the local exchange services market within specific metropolitan areas of Florida. With respect to the markets outside of Florida, including those to be accessed through the acquisition of EMI, there is currently similar local network service competition in substantially all of such markets. In addition, a continuing trend toward consolidation and strategic alliances within the telecommunications industry could result in significant new competition for the Company. AT&T and MCI have announced their intent to enter into the local network services market. Other potential competitors of the Company include utility companies, long distance carriers, wireless telephone systems and private networks built by individual business customers. The Company cannot predict the number of competitors that will emerge as a result of any new federal and state regulatory or legislative actions. The Company believes it has competitive advantages over other local network service providers in Florida because of ICI's incumbent status, existing Network Agreements (as defined) and customer relationships. Competition in all of the Company's geographic market areas is based on quality, reliability, customer service and responsiveness, service features and price. The Company has kept its prices at levels competitive with those of the LECs while providing, in the opinion of the Company, a higher level of service and responsiveness to its customers. ICI's broadband fiber ring networks provide both diverse routing and redundant electronics, high quality design features not fully deployed in the local telephone companies' networks. Although the LECs are generally subject to greater pricing and regulatory constraints than other local network service providers, LECs are achieving increasing pricing flexibility for their local services as a result of recent legislative and regulatory developments. The LECs have continued to lower rates, resulting in downward pressure on certain dedicated and switched access transport rates. This price erosion has decreased operating margins for these services. However, the Company believes this effect will be more than offset by the increased revenues available as a result of access to customers provided through interconnection co-carrier agreements and the opening of local exchange service to competition. In addition, the Company believes that lower rates for dedicated access will benefit other services offered, or planned to be offered, by the Company. 40 Enhanced Network Services. The Company faces competition in its enhanced network services business from LECs, IXCs, VSAT providers and others. Many of the Company's existing and potential competitors have financial, personnel and other resources significantly greater than those of the Company. The Company competes with the larger IXCs on the basis of service responsiveness, rapid response to technology and service trends, and a regional focus borne of early market successes. All of the major IXCs, including AT&T, MCI, Sprint Communications Company L.P. and LDDS Worldcom, Inc. offer frame relay services and several of the major IXCs have announced plans to provide Internet services. The Company believes it competes favorably with these providers in its markets, based on the high density of its networks, relatively greater experience and in-house expertise. Continued aggressive pricing is expected to support continued rapid growth, but will place increasing pressure on operating margins. The Company also competes with VSAT services on the basis of price and data capacity. The Company believes that the relatively low bandwidth of each VSAT terminal and the cost of purchasing and installing VSAT equipment limits the ability of VSAT to compete with the frame relay services provided by the Company. Many of the LECs now offer services similar to ICI's enhanced network services, but offer them only on an intraLATA basis. While the LECs generally cannot interconnect their frame relay networks with each other, both ICI and EMI have interconnected their frame relay networks with those of various LECs. As a result, ICI can use certain LEC services to keep its own costs down when distributing into areas that cannot be more economically serviced on its own networks. ICI expects the LECs to aggressively expand their enhanced network services as regulatory developments permit them to deploy interLATA long distance networks. When the LECs are permitted to provide such services, they will be in a position to offer single source service similar to that being offered by ICI. Interexchange Services. The Company currently competes with AT&T, MCI and others in the interexchange services market. In providing interexchange services, the Company focuses on quality service and economy to distinguish itself in a very competitive marketplace. ICI has built a loyal customer base by emphasizing its customer service. The additional new services that may be offered as the Company begins to implement local exchange service should further support this position by allowing the Company to market a wide array of fully integrated telecommunications services. Systems Integration. The Company faces competition in its systems integration business from equipment manufacturers, the RBOCs and other LECs, long distance carriers and systems integrators, many of which have financial, personnel and other resources significantly greater than those of the Company. GOVERNMENT REGULATION Overview. The Company's services are subject to varying degrees of federal, state and local regulation. The FCC exercises jurisdiction over all facilities of, and services offered by, telecommunications common carriers to the extent those facilities are used to provide, originate or terminate interstate or international communications. The state regulatory commissions retain jurisdiction over most of the same facilities and services to the extent they are used to originate or terminate intrastate communications. In addition, many of the regulations issued by these regulatory bodies may be subject to judicial review, the result of which ICI is unable to predict. Federal Regulation. The Company must comply with the requirements of common carriage under the Communications Act of 1934 (the "Communications Act"), as amended. Comprehensive amendments to the Communications Act were made by the 1996 Act, which was signed into law on February 8, 1996. The 1996 Act effected plenary changes in regulation at both the federal and state levels that affect virtually every segment of the telecommunications industry. The stated purpose of the 1996 Act is to promote competition in all areas of telecommunications and to reduce unnecessary regulation to the greatest extent possible. While it will take years for the industry to feel the full impact of the 1996 Act, it is immediately clear that the legislation provides the Company with both new opportunities and new challenges. 41 The 1996 Act gives the FCC the authority to forebear from regulating companies if it finds that such regulation does not serve the public interest, and directs the FCC to review its regulations for continued relevance on a regular basis. As a result of this directive, a number of the regulations that currently apply to the Company may be eliminated in the future. While it is therefore expected that a number of regulations that were developed prior to the 1996 Act will be eliminated in time, those which still apply to the Company at present are discussed below. The FCC has established different levels of regulation for dominant and non- dominant carriers. Of domestic common carrier services, only GTE Corporation (including its subsidiary, GTE Florida Incorporated) and the RBOCs are classified as dominant carriers, and all other providers of domestic common carrier services, including the Company, are classified as non-dominant carriers. While the recently enacted 1996 Act provides the FCC with the authority to forebear from imposing any regulations it deems unnecessary, including requiring non-dominant carriers to file tariffs, there can be no assurance that the FCC will so forebear. Challenges to tariffs by third parties may cause the Company to incur significant legal and administrative expenses. The FCC's Interconnection Decisions restructured the interstate competitive access services market. On September 17, 1992, the FCC ordered the RBOCs and all but one of the local telephone companies having in excess of $100 million in gross annual revenue for regulated services to provide expanded interconnection and collocation in local telephone company central offices and serving wire centers to any CAP, long distance carrier or end user seeking such interconnection for the provision of interstate access services. Subject to few exceptions, local telephone companies must offer interconnection in their central offices at cost-based rates. The FCC's Interconnection Decisions require local telephone companies to provide central office transmission equipment dedicated to interconnectors' use to terminate interconnectors' circuits. Consequently, the Company can reach most business customers in its metropolitan service areas, and thereby significantly expand its customer base. A decision by a federal appeals court invalidated some aspects of the FCC's initial collocation rules, thereby making collocation somewhat more costly and administratively difficult. As discussed below, however, the 1996 Act effectively overturns the appeals court decision and expands interconnection for both interstate and intrastate services. The 1996 Act greatly expands the FCC's collocation requirements on the LECs and may greatly increase the value and function of collocation to the Company and other interconnectors. The 1996 Act requires the LECs to: (i) provide physical collocation, which allows companies such as ICI and other interconnectors to install and maintain their own network termination equipment in LEC central offices; (ii) unbundle components of their local service networks so that other providers of competitive local service can compete for a wider range of local services customers; (iii) establish "wholesale" rates for their services to promote resale by CAPs and other competitors; (iv) establish number portability, which will allow a customer to retain its existing phone number if it switches from the LEC to a competitive local service provider; (v) establish dialing parity, which ensures that customers will not detect a quality difference in dialing telephone numbers or accessing operators or emergency services; and (vi) provide nondiscriminatory access to telephone poles, ducts, conduit and rights-of-way. In addition, the 1996 Act requires LECs to compensate competitive carriers for traffic originated by LEC's and terminated on the competitive carriers' networks. The FCC must establish regulations governing all of these conditions by August 1996. Although these requirements are intended to benefit new entrants in the local exchange market, such as ICI, the Company is unable to determine how effective they will be until the FCC completes its rulemaking proceedings and state regulators begin to implement the FCC's requirements. As part of its procompetitive policies, the 1996 Act frees the RBOCs from the judicial orders that prohibited their provision of interLATA services. Specifically, the Act permits RBOCs to provide long distance services outside of their local service regions immediately, and will permit them to provide in-region interLATA service upon demonstrating to the FCC and State regulatory agencies that they have adhered to the FCC's interconnection regulations. 42 As a result of these provisions of the 1996 Act, the Company will likely gain access to an expanded customer base, and should be able to realize a reduction in its costs of interconnection. At the same time, the Act also makes competitive entry more attractive to RBOCs, other LECs, interexchange carriers and other companies, and likely will increase the level of competition that the Company faces. The 1996 Act also repeals the telecommunications/cable television cross- ownership prohibition which generally had prohibited LECs from providing in- region cable television service. The 1996 Act's interconnection requirements also apply to interexchange carriers and all other providers of telecommunications services, although the terms and conditions for interconnection provided by these carriers are not regulated as strictly as interconnection provided by the LECs. This may provide the Company with the ability to reduce its own access costs by interconnecting directly with non-LECs, but may also cause the Company to incur additional administrative and regulatory expenses in reply to interconnection requests. While the 1996 Act reduces regulation to which non-dominant local exchange carriers are subject, it also reduces the level of regulation that applies to the LECs, and increases their ability to respond quickly to competition from the Company and others. Specifically, the 1996 Act will subject the LECs to "streamlined" tariff regulation, which greatly accelerates the time in which tariffs that change service rates take effect, and eliminates the requirement that LECs obtain FCC authorization before constructing new domestic facilities. These actions will allow LECs to change service rates more quickly in response to competition. Similarly, the FCC has initiated a proceeding to review its price cap rules that may permit significant new pricing flexibility to LECs. To the extent that such increased pricing flexibility is provided, the Company's ability to compete with LECs for certain services may be adversely affected. The 1996 Act directs the FCC, in cooperation with state regulators, to establish a Universal Service Fund that will provide subsidies to carriers that provide service to underserved individuals and high cost areas. These proceedings, which must be concluded by May, 1997, may require the Company to contribute to the Universal Service Fund, but may also allow the Company to receive payments from the Fund if it is deemed eligible. The Company also may provide service to underserved customers in lieu of making Universal Service Fund payments. The net revenue effect of these regulations on the Company cannot be determined at this time. In an order released on October 18, 1995, the FCC found that the transport of frame relay service should be classified as a "basic" service. Previously, it was common practice in the industry for many carriers to consider frame relay an "enhanced" service. This decision is significant because the FCC requires that basic services be tariffed, but permits enhanced services to be offered on an off-tariff basis. As a result of the FCC's decision, all carriers that provide frame relay transport must include the service in their federal tariffs by May 6, 1996. The Company has included its frame relay service in its federal tariff. The "basic" and "enhanced" terminology used by the FCC is a regulatory term of art denoting the classification of services for tariffing purposes. This regulatory use of the term should not be confused with the Company's description of a class of services--frame relay, ATM and Internet services--as "enhanced" elsewhere in this document. State Regulation. To the extent that the Company provides intrastate service, it is subject to the jurisdiction of the relevant state public service commissions. The Company currently provides some intrastate services in Florida, Missouri and Ohio and is subject to regulation by the public service commissions of those states. The Company also has a network providing interstate service in North Carolina, but is not currently certified to provide intrastate services. The Company anticipates providing local service in that state by the end of the year, however, and will become subject to regulation by the state regulatory commission at that time. EMI provides local access services and enhanced network services in New Jersey, New York and Pennsylvania, and is subject to the jurisdiction of the regulatory commissions in those states. In addition, Phone One is authorized in certain states to offer intrastate long distance service. The 1996 Act preempts state statutes and regulations that restrict the provision of competitive local services. As a result of this sweeping legislation, the Company will be free to provide the full range of intrastate local and long distance services in all states in which it currently operates, and any states into which it may expand. While this action greatly increases the Company's addressable customer base, it also increases the amount of competition to which the Company may be subject. 43 While all of the states listed above have recently enacted legislation or regulations that have permitted, or will permit, local service competition, the 1996 Act will require most of the states to modify these policies to bring them into conformance with federal standards. The 1996 Act also authorizes the states to adopt additional regulations to the extent that they do not conflict with the federal standards. It is unclear at this time how the states will respond to the new federal legislation, and what additional regulations they my adopt. While the 1996 Act's prohibition of state barriers to competitive entry took effect on February 8, 1996, there likely will be significant procedural delays before the new federal policies are fully implemented. Summaries of the currently applicable state regulations are set forth below. Florida. In Florida, the Company is subject to regulation by the Florida Public Service Commission ("FPSC"). Currently, the FPSC has authorized the Company to provide all intrastate services, including local exchange service. The Company is authorized to provide a full array of local exchange, enhanced data and long distance services in Florida. The FPSC does not require the Company to file tariffs or to meet any services standards for any of its intrastate CAP or local exchange services. The Florida Legislature in 1995 approved changes to the Florida telecommunications statute to permit the Company to operate on the same basis and with the same rights as the LECs. This is commonly referred to as being a "co-carrier." As a result of co-carrier status, the Company will be able to provide a greatly increased array of services subject to minimal regulatory oversight. Ohio. In Ohio, the Company is subject to regulation by the Public Utilities Commission of Ohio. As a certified carrier, ICI may provide intrastate special access and private line services. Additionally, the Company may resell CENTREX services subject to certain conditions. Missouri. In Missouri, the Company is subject to regulation by the Missouri Public Service Commission. As a certified carrier, ICI may provide intrastate private line and special access services. North Carolina. Due to state regulations, the Company is limited to operating as an interstate carrier in North Carolina, providing access to and between IXCs and between customers and their IXCs. A legislative initiative was recently passed in North Carolina which will permit the Company to provide intrastate services under the jurisdiction of the North Carolina Utilities Commission beginning in July 1996. The Company is in the process of being certified to provide a full array of telecommunications in North Carolina. Alabama. Due to state regulations, the Company is limited to operating as an interstate carrier in Alabama, providing access to and between IXCs and between customers and their IXCs. The Company is in the process of being certified to provide a full array of telecommunications services in Alabama. New Jersey. EMI is subject to regulation by the New Jersey Board of Public Utilities. Upon the consummation of the EMI Acquisition, the Company would be certified to provide intrastate access and enhanced network services in New Jersey. New York. EMI is subject to regulation by the New York Public Service Commission. Upon the consummation of the EMI Acquisition, the Company would be certified to provide a full array of intrastate telecommunications services including local exchange services in New York. Pennsylvania. EMI is subject to regulation by the Pennsylvania Utility Commission. Upon the consummation of the EMI Acquisition, the Company would be certified to provide intrastate access and enhanced network services in Pennsylvania. As the Company expands its operations into other states, it may become subject to the jurisdiction of their respective public service commissions for certain services offered by ICI. The Company does not believe that the services currently provided by it in other states are subject to regulation by the public service commissions of those states. The Company does not believe that its relationship with Latin American or other international service providers currently subjects it to (or will subject it to) regulation outside the United States. 44 Local Government Authorizations. The Company may be required to obtain from municipal authorities street opening and construction permits to install and expand its fiber optic networks in certain cities. In some cities, local partners or subcontractors may already possess the requisite authorizations to construct or expand the Company's networks. In some of the areas where the Company provides service, it may be subject to municipal franchise requirements and to pay license or franchise fees based on a percent of gross revenue. There are no assurances that certain municipalities that do not currently impose fees will not seek to impose fees in the future, nor is there any assurance that, following the expiration of existing franchises, fees will remain at their current levels. In many markets, other companies providing local telecommunications services, particularly the LECs, currently are excused from paying license or franchise fees or pay fees that are materially lower than those required to be paid by the Company. The 1996 Act requires municipalities to charge nondiscriminatory fees to all telecommunications providers, but it is uncertain how quickly this requirement will be implemented by particular municipalities in which the Company operates or plans to operate or whether it will be implemented without a legal challenge initiated by the Company or another competitive access provider. If any of the existing Network Agreements were terminated prior to their expiration date and the Company was forced to remove its fiber optic cables from the streets or abandon its network in place, even with compensation, such termination could have a material adverse effect on the Company. AGREEMENTS Interconnection Co-carrier Agreements. The Company has recently entered into interconnection co-carrier agreements with BellSouth, GTE and Sprint-United. Each of these agreements provides for mutual compensation and sets forth the other terms and conditions upon which the carriers may terminate traffic on each other's networks. The agreements further provide that to the extent that the agreement fails to contemplate issues arising during the implementation thereof, additional terms and conditions will be set by negotiation between the parties or set by the FPSC upon request of the parties. Each of these agreements expires on December 31, 1997. Network Agreements. The Company has built its digital fiber optic networks pursuant to various rights-of-way, conduit and dark fiber leases, utility pole attachment agreements and purchase arrangements (collectively, the "Network Agreements"). Substantially all of the Network Agreements (other than utility pole attachment agreements, which typically can be terminated on 90 days notice) are for a long-term and include renewal options. Although none of the Network Agreements are exclusive, the Company believes that conduit space, fiber availability and other physical constraints make it unlikely that the lessors under the various Network Agreements could easily make similar arrangements available to others. The Company believes that its relationships with its lessors are satisfactory. Certain of the Network Agreements require ICI to make revenue sharing payments or, in some cases, to provide a fixed price alternative or dark fiber to the lessor without an additional charge. In addition, the Company has various other performance obligations under its Network Agreements, the breach of which could result in the termination of such agreements. Further, actions by government regulatory bodies could, in certain instances, also result in the termination of certain Network Agreements. The cancellation of any of the material Network Agreements could materially adversely affect the Company's business in the affected metropolitan area. See "Risk Factors--Risk of Cancellation or Non-Renewal of Network Agreements." Interexchange Agreements. ICI, from time to time, enters into purchase agreements with interexchange carriers for the transport and/or termination of long distance calls outside of its territory. These contracts are typically one year in duration and cancelable within 90 days. ICI has entered into two purchase agreements which include minimum purchase amounts. The contract with Sprint Communications Company L.P. (expiring January 1, 1997) requires ICI to maintain a minimum monthly billing amount of $170,000 on the purchase of interstate transport and 1-800 services and the contract with The Carrier Group requires ICI to purchase a minimum of 850,000 minutes per month of domestic interstate transport at rates specified in the contract. The Carrier Group contract expires no later than August 31, 1996 and may expire earlier upon the occurrence of certain events specified in the contract. 45 UniSPAN(C). In order to provide end-to-end connectivity and interoperability throughout the United States to its enhanced network services customers, ICI entered into a frame relay service agreement (the "UniSPAN Agreement") in September 1994 with EMI, PacNet, Inc., Integrated Network Services, Inc. and MRC Telecommunications, Inc. In September 1995, Telemedia International, Inc., an international telecommunications company, became a party to the UniSPAN Agreement. Pursuant to the UniSPAN Agreement, each of the parties agreed to (i) provide frame relay services on its networks to each of the other parties, subject to available capacity and agreement as to certain terms including price and access to facilities, and (ii) use reasonable efforts to utilize the services of the other parties in the event that such party requires frame relay services in a geographic location not served by its own networks. The UniSPAN Agreement has an initial three year term with successive one year renewal periods until terminated by a majority vote of the parties. However, any party may withdraw from the agreement as of the expiration of any term by giving 60 days prior written notice thereof. Throughout the term of the UniSPAN Agreement and for one year thereafter, or for a period of one year after the withdrawal of any party, none of the parties may solicit to provide frame relay services to customers which were brought in to the UniSPAN(C) program by another party or for which frame relay services were requested by another party. EMPLOYEES As of March 31, 1996, ICI employed a total of 387 full-time employees and EMI employed 144 full-time employees. In addition, the Company anticipates that the number of employees will increase significantly throughout the year. The Company believes that its future success will depend in large part on its continued ability to attract and retain highly skilled and qualified personnel. ICI has nondisclosure agreements with all of its employees. The Company also regularly uses the services of contract technicians for the installation and maintenance of its networks. None of ICI's employees is represented by a collective bargaining agreement. ICI believes that its relations with its employees are good. PROPERTIES The Company leases its principal administrative, marketing, warehouse and service development facility located in Tampa, Florida, and leases other space for storage of its electronics equipment and for sales and engineering in other cities where the Company operates networks. EMI leases office space and/or other space for storage of its electronics equipment in various cities where it operates. The Company believes that its properties and those of EMI are adequate and suitable for their intended purpose. As of December 31, 1995, the Company's total telecommunications equipment in service consists of fiber optic telecommunications equipment (52%), fiber optic cable (29%), furniture and fixtures (5%), leasehold improvements (1%) and construction in progress (13%). Such properties do not lend themselves to description by character and location of principal units. Fiber optic cable plant used in providing service is primarily on or under public roads, highways or streets, with the remainder being on or under private property. Substantially all of the Company's telecommunications equipment is housed in multiple leased facilities in various locations throughout the metropolitan areas served by the Company. Equipment additions over the past five years include gross additions to telecommunications equipment having an estimated service life of one year or more. Additions, including capital leases, since January 1, 1991 were as follows (in thousands):
YEAR ENDED DECEMBER 31, AMOUNT ----------------------- ------- 1991...................................... $ 3,746 1992...................................... $ 9,687 1993...................................... $10,767 1994(1)................................... $18,289 1995...................................... $34,873
- -------- (1) Excludes $855 of capital lease obligations assumed in connection with the acquisition of Phone One. LEGAL PROCEEDINGS On May 3, 1995, the Company asserted a claim for indemnification against the former shareholder of Phone One (the "Former Shareholder") for approximately $1 million on account of various breaches of representations and warranties made by the Former Shareholder to the Company in the agreement for the acquisition of Phone 46 One (the "Phone One Acquisition Agreement"). The Former Shareholder has objected to the indemnification claim, which is subject to arbitration under the Phone One Acquisition Agreement. On July 27, 1995, the Company commenced an arbitration to recover $1,055,859 from the Former Shareholder. On October 9, 1995, the Former Shareholder filed an answer and counterclaims contesting liability and claiming damages for alleged breach of contract, misrepresentation, interference with business relations, and violations of state and federal statutes and regulations. The Former Shareholder claims damages in excess of $2 million and attorneys' fees on the principle assertion that the Company fraudulently induced the Former Shareholder to consummate the Phone One Acquisition Agreement by failing to disclose its alleged intention not to honor its obligations under a related long distance services agreement. While the indemnification claims and the counterclaims are in their earliest stages, the Company, after consultation with counsel, believes that it has meritorious defenses to the counterclaims, which it will vigorously contest, and that its indemnification claims are meritorious. On April 4, 1996, the Former Shareholder accepted a settlement proposal, subject to documentation, pursuant to which mutual general releases will be exchanged and ICI will deliver a portion of the shares placed in escrow as a hold back, pursuant to the terms of the Phone One Acquisition Agreement, however, no assurance can be given as to the ultimate outcome of the indemnification claim or the counterclaims. The Company is not a party to any other pending legal proceedings except for various claims and lawsuits arising in the normal course of business. The Company does not believe that these normal course of business claims or lawsuits will have a material effect on the Company's financial condition or results of operations. 47 MANAGEMENT The directors and executive officers of ICI, their respective ages, positions and biographies are as follows:
NAME AGE POSITION ---- --- -------- David C. Ruberg................ 50 Chairman of the Board, President and Chief Executive Officer Barbara L. Samson.............. 34 Senior Vice President, Investor Relations Ronald L. Tolliver............. 48 Senior Vice President, Chief Financial Officer and Secretary J. Christopher Brown........... 44 Senior Vice President, Marketing and Strategic Planning James F. Geiger................ 37 Senior Vice President, Sales Michael A. Viren............... 53 Senior Vice President, Engineering and Information Systems Robert A. Ruh.................. 51 Senior Vice President, Human Resources Mark A. Masi................... 39 Vice President, Field Operations Timothy N. Tuck................ 41 Vice President, Customer Operations Jeanne M. Walters.............. 33 Controller and Chief Accounting Officer John C. Baker.................. 46 Director George F. Knapp................ 64 Director
David C. Ruberg has served as President, Chief Executive Officer and a director of the Company since May 1993, and as Chairman of the Board since March 1994. From September 1991 to May 1993, Mr. Ruberg was an independent consultant to the computer and telecommunications industries. From 1989 to September 1991, Mr. Ruberg served as Vice President and General Manager of the Telecommunications Division and then of the Personal Computer/Systems Integration Division of Data General Corporation, a computer manufacturer. From 1984 to 1989, Mr. Ruberg served as a Vice President of TIE Communications, Inc., a manufacturer of telecommunications equipment. Mr. Ruberg received his B.A. in mathematics from Middlebury College and his M.S. in computer science from the University of Michigan. Barbara L. Samson, a co-founder of the Company, has served as a Vice President since June 1987, and as a Senior Vice President since October 1992. She served as President of the Company's predecessor from September 1986 to June 1987. Ms. Samson recently served two terms as Chairman of the Association of Local Telecommunications Services (ALTS), a national trade association. Ms. Samson received her B.S. degree in telecommunications from the University of Florida and her M.B.A. degree from the University of South Florida. Ronald L. Tolliver has served as a Senior Vice President of the Company since June 1993, Chief Financial Officer since June 1992 and Secretary since June 1993. He also served as Vice President of Government and Regulatory Affairs from July 1991 through June 1993. Mr. Tolliver joined the Company as Director of Government and Regulatory Affairs in January 1991. From July 1989 to January 1991, Mr. Tolliver was owner and founder of Tolliver and Company (a consulting company). Prior to starting his own company, Mr. Tolliver was a Vice President at Gold Key Incentives (a marketing incentives company) from April 1989 to July 1989. From 1981 to 1989, Mr. Tolliver held various executive positions in government and regulatory affairs at United Telephone System most recently Manager of New Services Pricing from 1986 to April 1989. Mr. Tolliver received his B.S. degree in management and finance from Florida Southern College and his M.B.A. at the University of South Florida. J. Christopher Brown has served as the Senior Vice President, Marketing and Strategic Planning of the Company since September 1994. Mr. Brown worked for British Telecom's Syncordia Outsourcing Unit from September 1991 until September 1994, most recently as the Marketing Department head. Mr. Brown worked for Sprint and its predecessors from May 1981 until September 1991, most recently as the Director of Market Development for Sprint's National Accounts Division. Mr. Brown earned a B.S.E.E. in electronics from the University of South Florida in 1974, and an M.B.A. from Emory University in 1987. James F. Geiger has served as Senior Vice President, Sales of the Company since August 1995, as the Vice President of Alternate Channel Sales from March 1995 through August 1995 and as the President of FiberNet since its inception. Mr. Geiger was one of the founding principals of FiberNet, initially serving as Vice President 48 of Sales & Marketing and subsequently serving as President. From April 1989 to April 1990, Mr. Geiger served as Director of Marketing for Associated Communications, a cellular telephone company. Mr. Geiger received his B.S. degree from Clarkson University in accounting. Michael A. Viren has served as Senior Vice President, Engineering and Information Systems since January, 1996, and as Vice President, Product Development from December 1992 through January 1996. Mr. Viren joined the Company in February 1991 as Director of Product Development. Mr. Viren worked for GTE from August 1986 to February 1991 as a specialist in wide and local area networking. Prior to that he operated his own consulting firm concentrating in WAN and LAN design; was Senior Vice President of Criterion, Inc., an economic consulting firm in Dallas, Texas; and served as the Director of the Utility Division of the Missouri Public Service Commission. Mr. Viren taught economics for 10 years, most recently as an Associate Professor of Economics at the University of Missouri-Columbia and prior to that at the University of Kansas. Mr. Viren received a Ph.D. in economics from the University of California-Santa Barbara and a B.S. in mechanical engineering from the California State University at Long Beach. Robert A. Ruh has served as Senior Vice President, Human Resources of ICI since March 1, 1996. From January 1991 through February 1996, Mr. Ruh founded and operated his own consulting company, specializing in human resource development. Prior to starting his own business, from 1975 to 1990, Mr. Ruh held corporate and group executive positions in human resources with Baxter Healthcare Corporation and American Hospital Supply Corporation. From 1973 to 1975, Mr. Ruh served as a consulting psychologist for Medina and Thompson, Inc., providing clients with assistance on executive assessment, selection and development. From 1970 to 1972, Mr. Ruh was on the corporate organization development staff at Corning Glass Works. Mr. Ruh received a B.A. in psychology from Valparaiso University and an M.A. and a Ph.D in industrial/organizational psychology from Michigan State University. Mr. Ruh served as Assistant Professor of Psychology of Michigan State University from 1970 to 1972. Mark A. Masi has served as Vice President, Operations and Customer Service of the Company since March 1995. Mr. Masi was one of the founders of FiberNet and, from November 1989 to March 1994, he served as FiberNet's Executive Vice President and Chief Financial Officer, responsible for funding and developing CAP operations. From March 1982 until November 1989, Mr. Masi held various management positions with Frontier Communications, Inc. (formerly Rochester Telephone Corporation). Mr. Masi is a graduate of the State University of New York College at Oswego with a degree in economics and the State University of New York at Binghamton with an M.B.A. in finance and management information systems. Timothy N. Tuck has served as Vice President, Customer Operations of the Company since January 1996 and served as President and Chief Operating Officer of Phone One from December 1994 until December 1995. From 1993 until the Company's acquisition of Phone One, Mr. Tuck served as the Chief Executive Officer and from 1989 to 1993 he served as the Chief Financial Officer of Phone One. From 1987 to 1989, Mr. Tuck served as a Vice President and Chief Financial Officer of Advantage Companies, Inc., a telecommunications company. Mr. Tuck received his B.S. degree and his M.B.A. from the University of Tennessee. Jeanne M. Walters has served as Controller and Chief Accounting Officer of the Company since May 1993. From November 1992 until May 1993 she served as Assistant Controller. From June 1988 to November 1992, Ms. Walters was an auditor at Ernst & Young LLP, a certified public accounting firm in Tampa, Florida. Ms. Walters received her B.S. in accounting and an M.B.A. from Wilkes University. She is licensed in the State of Florida as a certified public accountant. Mr. Baker has been a director of the Company since February 1988. Mr. Baker has been the principal at Baker Capital Corp., a multi-national venture capital firm, since October 1995. He was a Senior Vice President of Patricof & Co. Ventures, Inc., a multi-national venture capital firm from 1988 until September 1995. Mr. Baker is currently a director of Xpedite Systems, Inc., FORE Systems, Inc., American Mobile Satellite Corporation and Resource Bancshares Mortgage Group, Inc., all of which are publicly traded corporations. 49 Mr. Knapp has been a director of the Company since February 1988. He has been a principal of Communications Investment Group, an investment banking firm, since June 1990. From January 1988 until June 1989, Mr. Knapp was an associate at MBW Management, Inc., a venture capital firm. Prior to that time, he held various executive positions at ITT Corporation and its subsidiaries, most recently as Corporate Vice President of ITT Corporation. No family relationship exists between any of the directors and executive officers of the Company. Ronald L. Tolliver, Senior Vice President, Chief Financial Officer and Secretary of the Company, has advised the Company of his intention to resign his positions with the Company effective May 26, 1996 in order to pursue other opportunities. The Company is continuing its previously instituted search for a new Chief Financial Officer. Upon Mr. Tolliver's resignation becoming effective, Mr. Oscar Williams, a financial Vice President of the Company, will assume the additional position of Chief Financial Officer of the Company on an interim basis. 50 THE SELLING STOCKHOLDERS The following table sets forth, as of March 29, 1996, certain information regarding the Selling Stockholders' ownership of the Shares.
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP PRIOR TO OFFERING AFTER OFFERING -------------------------- --------------------------- NUMBER OF NUMBER OF NUMBER OF NAME OF SELLING STOCKHOLDER SHARES PERCENT SHARES OFFERED SHARES PERCENT - --------------------------- ------------ --------- -------------- ----------- ---------- APA Excelsior Venture Capital Holdings (Jersey) Ltd........... 171,818(1) 1.6% 171,166 652(1) * Air Canada, Trustee for Air Canada Pension Trust Fund............. 10,267 * 10,267 0 0 Anchor National Life Ins. Co. .............. 5,162 * 5,162 0 0 Wilmington Trust Company as Trustee of Du Pont Pension Trust.. 25,977 * 25,977 0 0 Landmark Venture Partners............... 20,591 * 20,591 0 0 Crossroads Capital Limited Partnership by Bigler Lattimer & Siegle................. 17,561 * 17,561 0 0 Landmark Equity Partners II..................... 5,162 * 5,162 0 0 LWG Family Partners..... 5,190 * 5,190 0 0 RAJ Family Partners..... 5,190 * 5,190 0 0 The Kerr Foundation, Inc. .................. 1,963 * 1,963 0 0 Grayce B. Kerr Fund, Inc. .................. 1,963 * 1,963 0 0 The Robert S. and Grayce B. Kerr Foundation, Inc. .................. 1,963 * 1,963 0 0 Charles P. Lazarus...... 10,379 * 10,379 0 0 Brinson Trust Company as Trustee for The Venture Partnership Acquisition Fund................... 24,406 * 24,406 0 0 Brinson Trust/IVCF...... 1,571 * 1,571 0 0 The Bank of N.Y. as Trustee for the Metromedia Company Employee Master Pension Trust ................. 6,480 * 6,480 0 0 The Bank of N.Y. as Trustee for the Metromedia Company Employee Pension Plan as Amended as of Jan. 1, 1987..... 6,480 * 6,480 0 0 Metropolitan Life Ins. Co. ................... 25,977 * 25,977 0 0 New York State Teachers' Retirement System...... 77,089 * 77,089 0 0 Unisys Corp. ........... 51,393 * 51,393 0 0 TI Employees' Pension Trust, The Northern Trust Co. ............. 20,759 * 20,759 0 0
- -------- * Less than one percent. (1) Includes 1992 Warrants to purchase up to 652 shares of Common Stock held by APA Excelsior Venture Capital Holdings (Jersey) Ltd. ("APA Venture"). Excludes 1992 Warrants to purchase up to 2,605 shares of Common Stock and 44,573 shares of Common Stock held by certain affiliates of APA Venture. 51 DESCRIPTION OF CAPITAL STOCK ICI's authorized capital stock consists of 20,000,000 shares of Common Stock, par value $.01 per share, and 500,000 shares of Preferred Stock, par value $1.00 per share ("Preferred Stock"). As of March 29, 1996, there were 10,386,218 shares of Common Stock issued and outstanding. On a fully-diluted basis, at that date, the Company had outstanding 13,195,077 shares of Common Stock after giving effect to (a) the exercise of the Outstanding Warrants (defined below), (b) the consummation of the EMI Acquisition and the issuance of 937,500 shares of Common Stock in connection therewith and (c) the exercise of all outstanding options with an exercise price below $17.50 issued pursuant to the Company's employee stock option plans. The Company has reserved (i) 1,240,257 shares (as of March 29, 1995) of Common Stock for issuance pursuant to the Company's 1992 Stock Option Plan and (ii) 674,332 shares of Common Stock for issuance upon exercise of warrants (the "Outstanding Warrants") issued to (x) NYL on June 5, 1991 (317,460 shares), (y) certain parties that made a bridge loan to the Company on March 7, 1992 (6,472 shares) and (z) certain investors in the Company's June 1995 private placement (350,400 shares). The Company intends to reserve 1,500,000 shares for issuance pursuant to the Long-Term Incentive Plan, which plan is subject to stockholder approval at the Company's annual meeting. All outstanding shares of Common Stock are fully paid and non-assessable. No shares of Preferred Stock are outstanding. The Company has proposed increasing the authorized Common Stock from 20,000,000 to 50,000,000 shares. This proposal will be voted upon at the annual meeting of the stockholders to be held on May 24, 1996. COMMON STOCK Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders. Holders of Common Stock do not have cumulative rights, so that holders of more than 50% of the shares of Common Stock are able to elect all of ICI's directors eligible for election in a given year. For a description of the classification of the Board, see "--Delaware Law and Certain Provisions of ICI's Certificate of Incorporation and Bylaws." Subject to the preferences that may be applicable to any then outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board out of funds legally available therefor. See "--Dividend Restrictions." Upon any liquidation, dissolution or winding up, whether voluntary or involuntary, of ICI, holders of Common Stock are entitled to receive pro rata all assets available for distribution to stockholders after payment or provision for payment of the debts and other liabilities of ICI and the liquidation preferences of any then outstanding Preferred Stock. There are no preemptive of other subscription rights, conversion rights, or redemption or sinking fund provisions with respect to shares of Common Stock. All outstanding shares of Common Stock are, and all shares of Common Stock to be outstanding upon exercise of the Outstanding Warrants will be, fully paid and non-assessable. PREFERRED STOCK The Preferred Stock may be issued at any time or from time to time in one or more series with such designations, powers, preferences, rights, qualifications, limitations and restrictions (including dividend, conversion and voting rights) as may be fixed by the Board, without any further vote or action by the stockholders. Although ICI has no present plans to issue any Preferred Stock, the ownership and control of ICI by the holders of the Common Stock would be diluted if ICI were to issue Preferred Stock that had voting rights or that was convertible into Common Stock. In addition, the holders of Preferred Stock issued by ICI would be entitled by law to vote on certain transactions such as a merger or consolidation, and thus the issuance of Preferred Stock could dilute the voting rights of the holders of the Common Stock on such issues. The issuance of Preferred Stock could also have the effect of delaying, deferring or preventing a change in control of ICI. DELAWARE LAW AND CERTAIN PROVISIONS OF ICI'S CERTIFICATE OF INCORPORATION AND BYLAWS General. The Certificate of Incorporation and the Bylaws of ICI contain certain provisions that could make more difficult the acquisition of ICI by means of a tender offer, a proxy contest or otherwise. These provisions 52 are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of ICI first to negotiate with ICI. Although such provisions may have the effect of delaying, deferring or preventing a change in control of ICI, the Company believes that the benefits of increased protection of ICI's potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure the Company outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. The description set forth below is intended as a summary only and is qualified in its entirety by reference to the Certificate of Incorporation and Bylaws of ICI. Board of Directors. ICI's Certificate of Incorporation provides that (i) the Board be divided into three classes of directors, with each class having a number as nearly equal as possible and with the term of each class expiring in a different year and (ii) the Board shall consist of not less than three nor more than seven members, the exact number to be determined from time to time by the Board. The Board has set the number of directors at three and the size of each class at one. Subject to any rights of holders of Preferred Stock, a majority of the Board then in office will have the sole authority to fill any vacancies on the Board. Stockholders can remove members of the Board only for cause. Stockholder Action and Special Meetings. ICI's Certificate of Incorporation provides that (i) any action required or permitted to be taken by ICI's stockholders must be effected at a duly called annual or special meeting of Stockholders and may not be effected by any consent in writing and (ii) the authorized number of directors may be changed only by resolution of the Board. The Company's Bylaws provide that, subject to any rights of holders of any series of Preferred Stock, special meetings of stockholders may be called only by the Chairman of the Board or the President of ICI, by a majority of the Board or by stockholders owning shares representing at least a majority of the capital stock of ICI issued and outstanding and entitled to vote. Stockholder's Rights Plan. ICI's Board of Directors has adopted a Stockholder's Rights Plan, pursuant to which rights to acquire a newly created series of Preferred Stock, exercisable upon the occurrence of certain events, including the acquisition by a person or group of a specified percentage of the Common Stock, were distributed to its stockholders. Anti-Takeover Statute. Subject to certain exceptions, Section 203 of the Delaware General Corporation Law (the "GCL") prohibits a publicly held Delaware corporation, such as ICI, from engaging in any "business combination" with an "interested stockholder" for a three-year period following the date on which such person became an interested stockholder, unless (i) prior to such date, the board of directors of the corporation approved either such business combination or the transaction that resulted in such person becoming an interested stockholder, (ii) upon consummation of the transaction that resulted in such person becoming an interested stockholder, such person owned at least 85% of the voting stock of the corporation outstanding immediately prior to such transaction (excluding certain shares) or (iii) on or subsequent to such date, such business combination is approved by the board of directors of the corporation and by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is essentially a person who, together with affiliates and associates, owns (or within the past three years has owned) 15% or more of the corporation's voting stock. It is anticipated that the provisions of Section 203 of the GCL may encourage any person interested in acquiring ICI to negotiate in advance with the Board since the stockholder approval requirement would be avoided if a majority of ICI's directors then in office approved either the business combination or the transaction that resulted in such person becoming an interested stockholder. DIVIDEND RESTRICTIONS The terms of the Indenture and the indenture governing the Existing Senior Notes restrict ICI's ability to pay dividends on the Common Stock. The payment of dividends on the Common Stock is also subject to the preference that may be applicable to any then outstanding Preferred Stock. 53 TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is Continental Stock Transfer & Trust Company. OUTSTANDING WARRANTS NYL currently holds warrants (the "NYL Warrants") to purchase up to 317,460 shares of Common Stock at an exercise price of $4.20 per share. The NYL Warrants will expire, to the extent not theretofore exercised, on June 2, 1997. Certain other stockholders of the Company hold warrants (the "1992 Warrants") to purchase an aggregate of 6,472 shares of Common Stock at an exercise price of $4.20 per share (subject to anti-dilution adjustments). The 1992 Warrants will expire, to the extent not theretofore exercised, on March 4, 1997. In addition, 160,000 warrants (the "Public Warrants"), each to purchase 2.19 shares of Common Stock, at an exercise price of $10.86 per share (subject to anti-dilution adjustments) were issued as part of a June 1995 private placement. The Public Warrants may be exercised after the earlier to occur of (i) June 1, 1996 or (ii) in the event of a change in control, the date the Company mails notice thereof to the holders. Unless exercised, the Public Warrants will expire on June 1, 2000. EXISTING REGISTRATION RIGHTS The Company is a party to several agreements pursuant to which certain stockholders have the right, among other matters, to require the Company to register their shares of Common Stock under the Securities Act under certain circumstances. These rights cover approximately 5,046,124 shares of Common Stock (including shares of Common Stock issuable in connection with the EMI Acquisition), and approximately 1,750,331 of such shares are covered by an effective registration statement. In addition, certain stockholders have exercised the right to include certain of their shares of Common Stock in the Registration Statement of which this Prospectus forms a part. 54 UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement (the "Underwriting Agreement") among the Company, the Selling Stockholders and the underwriters listed below (the "Underwriters"), the Company and the Selling Stockholders have agreed to sell to each of the Underwriters, and each of the Underwriters has severally agreed to purchase the respective number of Shares of Common Stock set forth opposite its name below:
UNDERWRITERS NUMBER OF SHARES ------------ ---------------- Bear, Stearns & Co. Inc.................................... 1,373,897 Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................................... 1,373,896 Morgan Stanley & Co. Incorporated.......................... 1,373,896 Smith Barney Inc. ......................................... 125,000 Robert W. Baird & Co. Incorporated......................... 125,000 Wheat, First Securities, Inc. ............................ 125,000 --------- Total.................................................. 4,496,689 =========
The Underwriting Agreement provides that the obligations of the Underwriters thereunder are subject to certain conditions precedent and that the Underwriters are severally committed to take and pay for all of the Shares if any are taken. If any of the Shares are purchased by the Underwriters pursuant to the Underwriting Agreement, all such Shares (other than the shares of Common Stock covered by the over-allotment option described below) must be so purchased. The Underwriting Agreement also provides that the Company and the Selling Stockholders will indemnify the Underwriters against certain liabilities in connection with the offer and sale of the Shares, including liabilities under the Securities Act of 1933, as amended, and contribute to payments that the Underwriters may be required to make in respect thereof. The Company and the Selling Stockholders have been advised by the Underwriters that they propose initially to offer the Common Stock to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $0.85 per share. The Underwriters may allow and such dealers may reallow a concession not in excess of $0.10 per share on sales to certain other dealers. After the initial public offering of the Shares, the public offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option to purchase up to an aggregate of 674,503 additional shares of Common Stock, at the initial public offering price less underwriting discounts and commissions, solely to cover over-allotments. Such option may be exercised at any time until 30 days after the date of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such Underwriter's initial commitment as indicated in the preceding table. 55 The Company and the Selling Stockholders have agreed not to issue, sell or otherwise dispose of any Common Stock or any security convertible into or exchangeable or exercisable for Common Stock of the Company, and to cause all directors, officers and certain stockholders of the Company and other affiliates not to sell or otherwise dispose of any Common Stock or any security convertible into or exchangeable or exercisable for Common Stock of the Company for a period of 120 days (or, in the case of certain institutional stockholders, for periods ranging from 30 to 90 days) from the date of execution of the Underwriting Agreement, subject to certain exceptions specified in the Underwriting Agreement. Each of Bear, Stearns & Co. Inc. and Morgan Stanley & Co. Incorporated acted as an initial purchaser in connection with the offering by the Company of units each consisting of $1,000 principal amount of the Existing Senior Notes and one Public Warrant in June 1995. In addition, Bear, Stearns & Co. Inc. has from time to time provided, and may in the future provide, financial advisory services to the Company for which it has received, and may in the future receive, customary compensation. LEGAL MATTERS The legality of the securities offered hereby has been passed upon for the Company by Kronish, Lieb, Weiner & Hellman LLP, 1114 Avenue of the Americas, New York, New York 10036-7798. Ralph J. Sutcliffe, a partner of Kronish, Lieb, Weiner & Hellman LLP, beneficially owns 5,745 shares of the Common Stock. Certain legal matters in connection with the sale of securities offered hereby will be passed upon for the Underwriters by their counsel Latham & Watkins, 885 Third Avenue, New York, New York 10022. EXPERTS The consolidated financial statements of the Company at December 31, 1994 and 1995 and for each of the three years in the period ended December 31, 1995, appearing in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent certified public accountants, as set forth in their report thereon appearing elsewhere herein and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The financial statements of the Telecommunications Division of EMI Communications, Inc. at July 31, 1994 and 1995, and for the years then ended, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent certified public accountants, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of FiberNet USA, Inc. and the Subsidiaries as of June 30, 1994 and for the period September 17, 1993 (inception) to June 30, 1994, appearing in the Company's Annual Report (Form 10-K) for the year ended December 31, 1995 have been audited by Mendelsohn Kary Bell & Natoli, P.C., independent auditors, as stated in their report thereon included therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such report given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of FiberNet Telecommunications Cincinnati, Inc., as of June 30, 1993 and 1994 and for the year ended June 30, 1994 and for the period August 20, 1992 (inception) to June 30, 1993 appearing in the Company's Annual Report (Form 10-K) for the year ended December 31, 1995 have been audited by Mendelsohn Kary Bell & Natoli, P.C., independent auditors, as stated in their reports thereon included therein and incorporated herein by reference. Such consolidated financial statements are incorporated herein by reference in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. 56 INDEX TO FINANCIAL STATEMENTS
PAGE ---- INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. Unaudited Pro Forma Condensed Consolidated Financial Statements.......... F-2 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. Report of Independent Certified Public Accountants....................... F-6 Consolidated Financial Statements for each of the Three Years in the Period Ended December 31, 1995....................................................... F-7 EMI COMMUNICATIONS, INC. Report of Independent Certified Public Accountants....................... F-22 Financial Statements for the Telecommunications Division for the Years Ended July 31, 1994 and 1995, and for the Six-Month Periods Ended January 31, 1995 and 1996 (unaudited)................................... F-23
F-1 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The accompanying unaudited pro forma condensed consolidated balance sheet as of December 31, 1995 includes the historical effects of the pending acquisition of the telecommunication assets of EMI Communications Corporation (EMI), a wholly-owned subsidiary of Newhouse Broadcasting Corporation. The accompanying unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 1995 has been prepared to reflect the acquisition of FiberNet USA, Inc. and Subsidiaries and FiberNet Telecommunications Cincinnati, Inc. (collectively, FiberNet) and EMI as if they were consummated on January 1, 1995. The pro forma information is based on the historical financial statements of the acquired businesses giving effect to the transactions under the purchase method of accounting and the assumptions and adjustments described in the accompanying Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements. The pro forma information does not purport to be indicative of the actual results that would have been achieved had the acquisitions actually been completed as of the dates indicated. The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the respective historical financial statements of Intermedia Communications of Florida, Inc. (ICI or the Company), FiberNet and EMI included elsewhere herein. F-2 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995
HISTORICAL --------------------------- PRO FORMA PRO FORMA CONSOLIDATED(1) EMI(2) ADJUSTMENTS TOTALS --------------- ----------- ------------ ------------ ASSETS Current assets: Cash and cash equivalents.......... $ 50,996,919 $ -- $ 50,996,919 Restricted investments.......... 18,854,015 -- 18,854,015 Short-term investments.......... 2,100,000 -- 2,100,000 Accounts receivable, net.................. 7,954,194 8,238,646 $ (8,238,646)(3) 7,954,194 Prepaid expenses, deposits and other current assets....... 1,832,186 464,302 (464,302)(3) 1,832,186 ------------ ----------- ------------ ------------ Total current assets.... 81,737,314 8,702,948 (8,702,948) 81,737,314 Restricted investments.. 30,869,001 -- 30,869,001 Telecommunications equipment, net......... 76,169,589 10,040,740 7,084,260 (4) 93,294,589 Intangibles, net........ 26,986,915 -- 26,986,915 Other assets............ 255,306 429,054 (429,054)(3) 255,306 ------------ ----------- ------------ ------------ Total assets........ $216,018,125 $19,172,742 $ (2,047,742) $233,143,125 ============ =========== ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable...... $ 4,810,175 $ 9,466,725 $ (9,466,725)(3) $ 4,810,175 Accrued interest...... 1,800,000 -- 1,800,000 Other accrued expenses............. 1,861,682 1,280,528 (1,280,528)(3) 2,111,682 250,000 (4) Advance billings...... 1,747,081 50,187 (50,187)(3) 1,747,081 Current portion of long-term debt....... 107,757 -- 107,757 Current portion of capital lease obligations.......... 1,057,927 -- 1,057,927 ------------ ----------- ------------ ------------ Total current liabilities........ 11,384,622 10,797,440 (10,547,440) 11,634,622 Long-term debt: Long-term debt........ 159,199,226 -- 159,199,226 Capital lease obligations.......... 5,179,914 -- 5,179,914 Other liabilities..... 574,961 (574,961)(3) -- ------------ ----------- ------------ ------------ Total liabilities... 175,763,762 11,372,401 (11,122,401) 176,013,762 Stockholders' equity: Common stock.......... 103,597 -- 9,375 (4) 112,972 Additional paid-in capital.............. 74,093,476 -- 16,865,625 (4) 90,959,101 Divisional equity..... -- 7,800,341 (7,800,341)(3) Accumulated deficit... (33,942,710) -- (33,942,710) ------------ ----------- ------------ ------------ Total stockholders' equity............. 40,254,363 7,800,341 9,074,659 57,129,363 ------------ ----------- ------------ ------------ Total liabilities and stockholders' equity............. $216,018,125 $19,172,742 $ (2,047,742) $233,143,125 ============ =========== ============ ============
F-3 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1995
HISTORICAL ------------------------------------ (A) (B) (C) PRO FORMA PRO FORMA CONSOLIDATED FIBERNET EMI ADJUSTMENTS TOTALS ------------ --------- ----------- ----------- ------------ Revenues................ $ 38,630,574 $ 38,790 $43,369,515 $ (351,796)(d) $ 81,687,083 Expenses: Facilities administration and maintenance and line costs................. 22,989,195 29,849 39,936,405 (351,796)(d) 62,603,653 Selling, general and administrative........ 14,992,458 236,572 3,065,864 18,294,894 Depreciation and amortization.......... 10,195,871 75,518 4,736,679 (2,290,250)(e) 12,808,073 90,255 (f) ------------ --------- ----------- ---------- ------------ 48,177,524 341,939 47,738,948 (2,551,791) 93,706,620 ------------ --------- ----------- ---------- ------------ Income (loss)from operations............. (9,546,950) (303,149) (4,369,433) 2,199,995 (12,019,537) Interest expense........ (13,766,639) (59,793) (532,320) 532,320 (g) (13,826,432) Interest and other income................. 4,060,040 -- 21,831 4,081,871 ------------ --------- ----------- ---------- ------------ Income (loss) before income taxes........... (19,253,549) (362,942) (4,879,922) 2,732,315 (21,764,098) Income taxes (benefit).. (96,952) -- (1,776,076) 1,776,076 (h) (96,952) ------------ --------- ----------- ---------- ------------ Income (loss) before extraordinary item..... $(19,156,597) $(362,942) $(3,103,846) $ 956,239 $(21,667,146) ============ ========= =========== ========== ============ Loss per share before extraordinary item..... $ (1.91) $ (1.95) ============ ============ Weighted average number of shares outstanding.. 10,035,774 11,087,205 (i) ============ ============
F-4 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS BALANCE SHEET ADJUSTMENTS (1) Represents the historical condensed consolidated balance sheet of ICI as of December 31, 1995. (2) Represents the historical condensed balance sheet of EMI as of January 31, 1996. EMI currently has a fiscal year end of July 31. (3) To reflect the elimination of all EMI assets, liabilities and divisional equity that are not being acquired by ICI as part of the purchase of EMI. Under the terms of the EMI purchase agreement, ICI is only acquiring the telecommunications assets of EMI which principally consist of telecommunications equipment and existing telecommunications service contracts. (4) To reflect the issuance of ICI common stock in exchange for the telecommunications assets of EMI. Under the terms of the EMI purchase agreement, ICI has agreed to issue 937,500 shares of common stock for such assets. For pro forma purposes, the stock has been valued at $18 per share which represents an average of the selling price of ICI's common stock for a period before and after the date of the acquisition agreement, February 20, 1996. The Company has initially allocated all of the estimated fair value of the common stock plus $250,000 in estimated acquisition-related costs to the telecommunications equipment pending final analysis of the value of the equipment and any acquired intangible assets. The purchase price allocation does not include a contingent cash payment of $594,000 if certain planned network expansion is completed by EMI prior to closing. STATEMENT OF OPERATIONS ADJUSTMENTS (a) Represents the historical condensed consolidated statement of operations of ICI for the year ended December 31, 1995, which include the operations of FiberNet from March 1, 1995. (b) Represents the historical condensed statement of operations of FiberNet for the two months ended February 28, 1995. (c) Represents the historical condensed statement of operations of EMI for the twelve months ended January 31, 1996. (d) Represents the elimination of revenues between ICI and EMI. (e) Represents the reduction in historical depreciation expense of EMI's telecommunications equipment as a result of the allocation of estimated purchase price. In addition, the assets are being depreciated on a straight-line basis using an estimated weighted average remaining life of seven years for pro forma purposes versus the original estimated lives and the accelerated depreciation method historically followed. (f) To reflect the two months of goodwill amortization related to the FiberNet acquisition not included in ICI's historical consolidated financial statements. (g) Represents the elimination of interest costs which would not have been incurred because of the proposed acquisition of EMI's telecommunications assets with ICI Common Stock. (h) Represents the elimination of EMI's historical income tax benefit as a result of ICI's significant net operating losses. (i) The pro forma weighted average number of shares outstanding has been adjusted to reflect the issuance of Common Stock for the FiberNet and EMI acquisitions as if they occurred at the beginning of the indicated period. F-5 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Intermedia Communications of Florida, Inc. We have audited the accompanying consolidated balance sheets of Intermedia Communications of Florida, Inc. as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Intermedia Communications of Florida, Inc. at December 31, 1994 and 1995, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Ernst & Young LLP Tampa, Florida February 20, 1996 F-6 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------------- 1994 1995 ----------- ------------ ASSETS Current assets: Cash and cash equivalents......................... $10,208,187 $ 50,996,919 Restricted investments............................ -- 18,854,015 Short-term investments............................ 50,000 2,100,000 Accounts receivable, less allowance for doubtful accounts of $545,400 in 1994 and $869,000 in 1995............................................. 5,321,276 7,954,194 Prepaid expenses and other current assets......... 1,021,493 1,832,186 ----------- ------------ Total current assets................................ 16,600,956 81,737,314 Restricted investments.............................. -- 30,869,001 Telecommunications equipment, net................... 44,665,937 76,169,589 Intangibles, net.................................... 12,414,618 26,986,915 Other assets........................................ 404,641 255,306 ----------- ------------ Total assets........................................ $74,086,152 $216,018,125 =========== ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................. $ 3,354,844 $ 4,810,175 Accrued taxes..................................... 537,452 285,757 Accrued interest.................................. 85,658 1,800,000 Other accrued expenses............................ 395,388 1,575,925 Advance billings.................................. 1,056,035 1,747,081 Current portion of long-term debt................. 101,326 107,757 Current portion of capital lease obligations...... 1,481,815 1,057,927 ----------- ------------ Total current liabilities........................... 7,012,518 11,384,622 Long-term debt payable to a stockholder............. 9,646,927 -- Long-term debt...................................... 323,306 159,199,226 Capital lease obligations........................... 4,973,086 5,179,914 Deferred income taxes............................... 96,952 -- Stockholders' equity: Preferred stock, $1.00 par value; 500,000 shares authorized; no shares issued..................... -- -- Common stock, $.01 par value; 20,000,000 shares authorized; 9,659,188 and 10,359,771 shares is- sued in 1994 and 1995............................ 96,592 103,597 Additional paid-in capital........................ 65,130,839 74,093,476 Accumulated deficit............................... (13,194,068) (33,942,710) ----------- ------------ Total stockholders' equity.......................... 52,033,363 40,254,363 ----------- ------------ Total liabilities and stockholders' equity.......... $74,086,152 $216,018,125 =========== ============
See accompanying notes. F-7 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 --------------------------------------- 1993 1994 1995 ----------- ------------ ------------ Revenues.............................. $ 8,292,291 $ 14,272,396 $ 38,630,574 Expenses: Facilities administration and main- tenance and line costs............. 2,843,077 5,395,932 22,989,195 Selling, general, and administra- tive............................... 3,892,842 6,412,287 14,992,458 Depreciation and amortization....... 3,020,471 5,131,940 10,195,871 ----------- ------------ ------------ 9,756,390 16,940,159 48,177,524 ----------- ------------ ------------ Loss from operations.................. (1,464,099) (2,667,763) (9,546,950) Other income (expense): Interest expense.................... (843,782) (1,218,876) (13,766,639) Interest and other income........... 233,629 819,260 4,060,040 ----------- ------------ ------------ Loss before income tax benefit and ex- traordinary item..................... (2,074,252) (3,067,379) (19,253,549) Income tax benefit.................... -- -- 96,952 ----------- ------------ ------------ Loss before extraordinary item........ (2,074,252) (3,067,379) (19,156,597) Extraordinary loss on early extin- guishment of debt.................... -- -- (1,592,045) ----------- ------------ ------------ Net loss.............................. $(2,074,252) $ (3,067,379) $(20,748,642) =========== ============ ============ Earnings (loss) per share: Loss before extraordinary item...... $ (0.29) $ (0.34) $ (1.91) Extraordinary loss.................. -- -- (0.16) ----------- ------------ ------------ Net loss per share.................. $ (0.29) $ (0.34) $ (2.07) =========== ============ ============ Weighted average number of shares out- standing............................. 7,077,203 8,955,993 10,035,774 =========== ============ ============
See accompanying notes. F-8 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ADDITIONAL -------------------- PAID-IN ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY ---------- -------- ----------- ------------ ------------- Balance at January 1, 1993................... 6,872,163 $ 68,722 $29,240,377 $ (8,052,437) $21,256,662 Proceeds from public offering, net of issuance costs........ 2,000,000 20,000 26,661,859 -- 26,681,859 Exercise of stock options for 22,076 shares of Common Stock at prices ranging from $6.60 to $9.13 per share................. 22,076 220 145,910 -- 146,130 Exercise of stock warrants for 1,246 shares of Common Stock at $4.20 per share.... 1,246 12 5,221 -- 5,233 Forfeiture of 14,695 shares of Common Stock at $.01 per share..... (14,695) (147) 147 -- -- Purchase and retirement of 3,358 shares of Common Stock.......... (3,358) (33) (28,173) -- (28,206) Net loss............... -- -- -- (2,074,252) (2,074,252) ---------- -------- ----------- ------------ ----------- Balance at December 31, 1993................... 8,877,432 88,774 56,025,341 (10,126,689) 45,987,426 Issuance of shares of Common Stock for business combination, net of issuance costs................. 740,000 7,400 8,836,100 -- 8,843,500 Exercise of stock options for 41,756 shares of Common Stock at prices ranging from $6.25 to $10.63 per share................. 41,756 418 269,398 -- 269,816 Net loss............... -- -- -- (3,067,379) (3,067,379) ---------- -------- ----------- ------------ ----------- Balance at December 31, 1994................... 9,659,188 96,592 65,130,839 (13,194,068) 52,033,363 Issuance of shares of Common Stock for business combination, net of issuance costs................. 683,583 6,836 7,854,369 -- 7,861,205 Return and cancellation of escrowed shares issued for 1994 business combination.. (22,357) (224) (279,239) -- (279,463) Exercise of stock options and warrants for 39,357 shares of Common Stock at prices ranging from $4.20 to $12.20 per share...... 39,357 393 336,307 -- 336,700 Issuance of detachable stock purchase warrants, net of issuance costs........ -- -- 1,051,200 -- 1,051,200 Net loss............... -- -- -- (20,748,642) (20,748,642) ---------- -------- ----------- ------------ ----------- Balance at December 31, 1995................... 10,359,771 $103,597 $74,093,476 $(33,942,710) $40,254,363 ========== ======== =========== ============ ===========
See accompanying notes. F-9 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 -------------------------------------- 1993 1994 1995 ----------- ----------- ------------ OPERATING ACTIVITIES Net loss.............................. $(2,074,252) $(3,067,379) $(20,748,642) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization....... 3,020,471 5,131,940 10,607,666 Extraordinary loss.................. -- -- 1,592,045 Deferred tax benefit................ -- -- (96,952) Provision for doubtful accounts..... 48,524 80,222 856,055 Changes in operating assets and lia- bilities: Accounts receivable................ (903,129) (1,273,985) (3,442,940) Prepaid expenses and other current assets............................ (64,991) (741,888) (204,824) Other assets....................... -- -- 159,751 Accounts payable................... 91,564 (552,512) (591,955) Other accrued expenses and taxes... 200,233 (360,073) 1,483,878 Advance billings................... 150,830 367,290 691,046 ----------- ----------- ------------ Net cash provided by (used in) operat- ing activities....................... 469,250 (416,385) (9,694,872) INVESTING ACTIVITIES Purchase of restricted investments.... -- -- (58,902,496) Maturities of restricted investments.. -- -- 9,179,480 Purchase of business, net of cash ac- quired............................... -- -- (1,952,268) Purchases of short-term investments... -- -- (2,050,000) Purchases of telecommunications equip- ment................................. (10,485,577) (13,730,693) (29,962,419) Sales of short-term investments....... 9,800,000 -- -- Other investing activities............ -- 201,701 -- ----------- ----------- ------------ Net cash used in investing activi- ties................................. (685,577) (13,528,992) (83,687,703) FINANCING ACTIVITIES Issuance of common stock, net of issu- ance costs........................... 26,681,859 -- -- Exercise of stock warrants and op- tions................................ 151,363 269,816 336,700 Purchase of treasury stock............ (28,206) -- -- Payments on long-term debt............ -- (3,143,782) (14,804,457) Net proceeds from issuance of senior notes and warrants................... -- -- 153,766,848 Payments on capital leases............ (410,055) (926,318) (5,127,784) ----------- ----------- ------------ Net cash provided by (used in) financ- ing activities....................... 26,394,961 (3,800,284) 134,171,307 ----------- ----------- ------------ Increase (decrease) in cash and cash equivalents.......................... 26,178,634 (17,745,661) 40,788,732 Cash and cash equivalents at beginning of year.............................. 1,775,214 27,953,848 10,208,187 ----------- ----------- ------------ Cash and cash equivalents at end of year................................. $27,953,848 $10,208,187 $ 50,996,919 =========== =========== ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid......................... $ 1,178,884 $ 1,481,679 $ 12,318,014 =========== =========== ============
See accompanying notes. F-10 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Intermedia Communications of Florida, Inc. (ICI) provides integrated telecommunications services to business and government customers primarily in the Southeastern United States. The Company provides data and video telecommunications services, frame relay, Internet access services, local exchange services, long distance services and telecommunications equipment. Effective December 2, 1994, ICI acquired 100% of the outstanding stock of Phone One, Inc. Phone One, Inc. provides long distance telephone service to business and residential customers. During 1995, the Company acquired all of the outstanding stock of FiberNet USA, Inc. and FiberNet Telecommunication Cincinnati, Inc. (collectively, FiberNet), which resulted in the expansion of ICI's network. See Note 2. A significant portion of the Company's revenue in 1993 and 1994 was from several long distance carriers (IXCs), including MCI and AT&T. Revenues from the IXCs include revenues from services used by the IXCs as well as services used by the IXCs' end users. Revenues from MCI totaled 19% and 11% of total revenues in 1993 and 1994, respectively. Revenues from AT&T represented 11% and 6% of total revenues in 1993 and 1994, respectively. Revenues from MCI and AT&T together totaled less than 10% for 1995. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Intermedia Communications of Florida, Inc. and its wholly-owned subsidiaries, Phone One, Inc. and FiberNet (collectively, the Company), from the respective dates of acquisition. All material intercompany transactions and balances have been eliminated in consolidation. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. SHORT-TERM INVESTMENTS Short-term investments consist of certificates of deposit with maturities of more than three months when purchased and are stated at cost. RESTRICTED INVESTMENTS Restricted investments are U.S. Treasury Notes which are restricted for the repayment of interest on certain debt and are stated at amortized cost. Management designated these investments as held-to-maturity securities in accordance with the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." See Notes 5 and 9. F-11 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TELECOMMUNICATIONS EQUIPMENT Telecommunications equipment is stated at cost. Depreciation expense is calculated using the straight-line method over the estimated useful lives of the assets as follows: Telecommunications equipment.................................. 3-7 years Fiber optic cable............................................. 20 years Furniture and fixtures........................................ 5-7 years
Leasehold improvements are amortized using the straight-line method over the shorter of the term of the lease or the estimated useful life of the improvements. INTANGIBLES Intangible assets are stated at cost and include purchased customer lists, deferred debt issuance costs, and the excess of cost over the fair value of identifiable net assets acquired (goodwill). Customer lists represent records and files obtained from acquired businesses that contain information on customers and the related information essential to contract renewals. Customer lists are being amortized using the straight-line method over their estimated useful lives of eight years. Goodwill is amortized using the straight-line method over periods of eight to forty years. Deferred debt issuance costs relate to the issuance of debt and are amortized using the effective interest method over the term of the related agreements. The related amortization is included as a component of interest expense in the accompanying consolidated statements of operations. The carrying value of goodwill and customer list will be reviewed if circumstances suggest that it may be impaired. If this review indicates that the intangible assets will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of cash flows. REVENUE RECOGNITION The Company recognizes revenue in the period the service is provided or the goods are shipped for equipment product sales. Unbilled revenues represent revenues earned for telecommunications services provided which will be billed in the succeeding month and totaled $532,000 and $636,257 as of December 31, 1994 and 1995, respectively. Unbilled revenues are included as a component of accounts receivable in the accompanying consolidated balance sheets. INCOME TAXES The Company has applied the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires an asset and liability approach in accounting for income taxes for all years presented. Deferred income taxes are provided for in the consolidated financial statements and principally relate to net operating losses and basis differences for customer lists and telecommunications equipment. F-12 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATIONS OF CREDIT RISK The Company's financial instruments that are exposed to concentrations of credit risk, as defined by Statement of Financial Accounting Standards No. 105, "Disclosure of Information About Financial Instruments with Off-Balance- Sheet Risk and Financial Instruments with Concentrations of Credit Risk," are primarily cash and cash equivalents and accounts receivable. The Company places its cash and temporary cash investments with high-quality institutions. As of December 31, 1995, cash equivalents totaling approximately $51.3 million were held by a single financial institution. Such amounts were collateralized by government-backed securities. Accounts receivable are due from residential and commercial telecommunications customers primarily located in Florida. Credit is extended based on evaluation of the customer's financial condition and generally collateral is not required. Anticipated credit losses are provided for in the consolidated financial statements and have been within management's expectations. STATEMENT OF CASH FLOWS The operating, investing and financing activities included in the 1994 and 1995 consolidated statements of cash flows are presented net of the assets and liabilities acquired in connection with business combinations. See Note 2. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of" (FAS 121), which requires impairment losses to be recognized for long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows are not sufficient to recover the assets' carrying amount. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. During 1995, the Company adopted the provisions of FAS 121 with no impact to the consolidated financial statements. In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting and Disclosure of Stock-Based Compensation," which encourages but does not require companies to recognize stock awards based on their fair value at the date of grant. The Company currently follows, and expects to continue to follow, the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for its employee stock options. Under APB 25, no compensation expense is recognized when the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant. RECLASSIFICATIONS Certain amounts in the 1993 and 1994 financial statements have been reclassified to conform to 1995 presentations. F-13 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. ACQUISITIONS Effective December 2, 1994, the Company acquired all of the common stock of Phone One, Inc. in exchange for 740,000 shares of common stock of the Company valued at approximately $8.8 million. The acquisition has been accounted for by the purchase method of accounting, with the purchase price allocated based on fair values of assets acquired and liabilities assumed. Under the terms of the purchase agreement, 60,000 of the 740,000 shares were held in escrow pending the resolution of certain indemnified items. Of the 60,000 shares, 22,357 shares were canceled during 1995 to settle one indemnified item. Settlement of the remaining escrowed shares is contingent upon the resolution of a claim for indemnification (see Note 12). The operating results of Phone One, Inc. are included in the Company's consolidated financial statements from the date of acquisition. On February 15, 1995, ICI acquired FiberNet in exchange for 683,583 shares of the Company's common stock and a note payable of $1.2 million which was paid on July 17, 1995, upon final closing. The Company has accounted for the FiberNet transaction as if it occurred on March 1, 1995. The Company determined that FiberNet's estimated operating results for the period February 16, 1995 to February 28, 1995 were not material to its operations. The operating results of FiberNet are included in the Company's consolidated financial statements since March 1, 1995. The following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions of Phone One, Inc. and FiberNet had occurred at the beginning of the periods presented, and do not purport to be indicative of the results that actually would have occurred if the acquisition had been acquired as of those dates or of results which may occur in the future.
YEAR ENDED DECEMBER 31 ------------------------- 1994 1995 ----------- ------------ Revenue....................................... $28,426,815 $ 38,669,364 Loss before extraordinary item................ (7,978,825) (19,609,794) Net loss...................................... (7,978,825) (21,201,839) Net loss per share............................ $ (.77) $ (2.09)
3. TELECOMMUNICATIONS EQUIPMENT Telecommunications equipment consisted of:
DECEMBER 31 -------------------------- 1994 1995 ------------ ------------ Telecommunications equipment.................. $ 28,429,370 $ 50,506,651 Fiber optic cable............................. 18,362,936 27,891,274 Furniture and fixtures........................ 1,899,597 5,223,389 Leasehold improvements........................ 588,823 985,876 Construction in progress...................... 8,122,837 12,830,122 ------------ ------------ 57,403,563 97,437,312 Less accumulated depreciation................. (12,737,626) (21,267,723) ------------ ------------ $ 44,665,937 $ 76,169,589 ============ ============
F-14 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. TELECOMMUNICATIONS EQUIPMENT (CONTINUED) Depreciation expense totaled $2,931,405, $4,911,001 and $7,940,173 in 1993, 1994 and 1995, respectively. Telecommunications equipment and construction in progress included $7,890,234 and $7,264,534 of equipment recorded under capitalized lease arrangements at December 31, 1994 and 1995, respectively. Accumulated amortization of assets recorded under capital leases amounts to $1,340,006 and $1,007,802 at December 31, 1994 and 1995, respectively. Telecommunications equipment purchases financed through capital lease obligations totaled $281,836, $4,558,761 and $4,910,724 in 1993, 1994 and 1995, respectively. The amortization of assets recorded under capital leases is included in depreciation expense. In connection with network expansion, the Company had commitments for capital expansion of approximately $8 million at December 31, 1995. 4. INTANGIBLES Intangibles consisted of:
DECEMBER 31 ------------------------ 1994 1995 ----------- ----------- Customer lists.................................. $10,096,975 $10,096,975 Goodwill........................................ 2,277,225 13,210,045 Debt issuance costs............................. 599,307 6,233,152 ----------- ----------- 12,973,507 29,540,172 Less accumulated amortization................... (558,889) (2,553,257) ----------- ----------- $12,414,618 $26,986,915 =========== ===========
Amortization expense amounted to $89,066 in 1993, $220,939 in 1994 and $2,011,508 in 1995. 5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS Long-term debt consisted of:
DECEMBER 31 ------------------------- 1994 1995 ----------- ------------ Senior Notes................................... $ -- $158,983,840 Senior Secured Notes........................... 6,000,000 -- Senior Subordinated Debentures................. 3,646,927 -- Other notes payable............................ 424,632 323,143 ----------- ------------ 10,071,559 159,306,983 Less current portion........................... (101,326) (107,757) ----------- ------------ $ 9,970,233 $159,199,226 =========== ============
During June 1995, ICI issued $160 million principal amount of 13.5% Senior Notes due 2005 which were subsequently exchanged for 13 1/2% Series B Senior Notes due 2005 (the Senior Notes) and warrants to purchase 350,400 shares of the Company's common stock. The Company has allocated $1,051,200 of the proceeds to the warrants, representing the estimated fair value at the date of issuance. The Senior Notes are limited in aggregate principal amount to $160 million and mature on June 1, 2005. The Senior Notes may be redeemed at the option of the Company, in whole or in part, on or after June 1, 2000, at a premium of 106.75% of par and declining to F-15 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (CONTINUED) par in 2003, plus accrued and unpaid interest and liquidated damages, if any, through the redemption rate. The Senior Notes bear interest at the rate of 13.5% per annum payable semiannually in arrears on June 1 and December 1. The Senior Notes agreement contains certain covenants including limits on the issuance of additional indebtedness, with which the Company is in compliance at December 31, 1995. The Company used a portion of the proceeds to retire its other long-term indebtedness and to repay certain capital lease obligations. The remaining proceeds will be used for capital expenditures in connection with the Company's expansion, for working capital and to purchase securities for an interest repayment fund. See Note 9. In connection with the repayment of certain indebtedness, the Company incurred a prepayment penalty of approximately $1,156,000. This amount, plus the write-off of the related unamortized financing costs have been reported as an extraordinary loss in the accompanying consolidated statement of operations. Long-term debt maturities as of December 31, 1995 for the next five years are as follows: 1996............................................................. $107,757 1997............................................................. 103,816 1998............................................................. 56,555 1999............................................................. 55,015 2000............................................................. --
For the years ended December 31, 1993, 1994 and 1995, the Company capitalized interest cost of $213,668, $257,058 and $677,512, respectively. The Company is a party to various capital lease agreements for strands of fiber optic cable, underground conduit and utility poles for the Company's telecommunication uses which extend through the year 2015. Future minimum lease payments for assets under the capital leases at December 31, 1995 are as follows: 1996......................................................... $ 1,751,890 1997......................................................... 1,223,010 1998......................................................... 1,061,638 1999......................................................... 1,022,896 2000......................................................... 991,696 Thereafter................................................... 6,413,704 ----------- 12,464,834 Less amount representing interest............................ (6,226,993) ----------- Present value of future minimum lease payments............... 6,237,841 Less current portion......................................... (1,057,927) ----------- $ 5,179,914 ===========
F-16 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and fair values of the Company's financial instruments at December 31, 1995 are as follows:
DECEMBER 31, 1995 ------------------------- CARRYING AMOUNT FAIR VALUE ------------ ------------ ASSETS: Cash and cash equivalents................... $ 50,996,919 $ 50,996,919 Short-term investments...................... 2,100,000 2,100,000 Restricted investments, current and noncurrent................................. 49,723,016 49,964,050 Accounts receivable......................... 7,954,194 7,954,194 LIABILITIES: Long-term debt: Senior Notes............................... $158,983,840 $179,200,000 Other notes payable........................ 323,143 323,143
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and cash equivalents, short-term investments, accounts receivable and other notes payable: The carrying amount of these items are a reasonable estimate of their fair value. Restricted investments: As of December 31, 1995, these investments are classified as held-to-maturity, in accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." The fair value of these investments is estimated from quoted market prices. Senior Notes: The estimated fair value is based on negotiated trades for the securities including the related detachable warrants at year end as provided by the Company's investment banker. 7. OPTIONS AND WARRANTS At December 31, 1995 warrants to purchase the following shares of the Company's common stock were outstanding:
SHARES PRICE PER SHARE EXPIRATION DATE ------ --------------- --------------- 6,472 $ 4.20 March 4, 1997 317,460 4.20 June 2, 1997 350,400 10.86 June 1, 2000
F-17 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7. OPTIONS AND WARRANTS (CONTINUED) The Company has a Stock Option Plan (the Plan) under which options to acquire an aggregate of 1,346,000 shares of Common Stock may be granted to employees, officers, directors and consultants of the Company. The Plan authorizes the Board of Directors (the Board) to issue incentive stock options (ISOs), as defined in Section 422A(b) of the Internal Revenue Code, and stock options that do not conform to the requirements of that Code section (Non- ISOs). The Board has discretionary authority to determine the types of stock options to be granted, the persons among those eligible to whom options will be granted, the number of shares to be subject to such options, and the terms of the stock option agreements. The exercise price of each ISO shall not be less than the fair market value of the Common Stock at the time of the grant. The exercise price of each Non-ISO will be determined by the Board at the time of the grant. Options may be exercised in the manner and at such times as fixed by the Board, but may not be exercised after the tenth anniversary of the grant of such options. The following table summarizes the transactions for the three years ended December 31, 1995 relating to the Plan:
NUMBER OF PER SHARE SHARES OPTION PRICE --------- ------------- Outstanding, January 1, 1993.......................... 327,928 $ 6.06-$ 8.00 Granted.............................................. 408,251 $ 6.13-$12.13 Exercised............................................ (22,076) $ 6.60-$ 9.13 Canceled............................................. (86,364) $ 6.50-$ 9.13 --------- Outstanding, December 31, 1993........................ 627,739 $ 6.06-$12.13 Granted.............................................. 233,248 $10.25-$12.25 Exercised............................................ (41,756) $ 6.25-$10.63 Canceled............................................. (70,464) $ 6.06-$12.13 --------- Outstanding, December 31, 1994........................ 748,767 $ 6.06-$12.25 Granted.............................................. 549,057 $ 9.50-$15.56 Exercised............................................ (37,831) $ 6.38-$12.25 Canceled............................................. (121,019) $ 6.38-$12.25 --------- Outstanding, December 31, 1995........................ 1,138,974 $ 6.06-$15.56 ========= Exercisable, December 31, 1995........................ 321,843 $ 6.06-$15.56
The Board of Directors has reserved 675,868 shares of common stock in connection with Stock Purchase Warrants, and 1,244,337 shares of common stock that may be issued to employees, officers, directors, and consultants of the Company pursuant to stock options as may be determined by the Board of Directors. F-18 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. INCOME TAXES At December 31, 1995, the Company had temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts measured by tax laws. The Company also has net operating loss (NOL) carryforwards available to offset future taxable income. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
DEFERRED TAX ASSET (LIABILITY) ------------------------ 1994 1995 ----------- ----------- TEMPORARY DIFFERENCES/CARRYFORWARDS Tax over book depreciation........................ $(2,777,874) $(3,410,117) Intangibles....................................... (3,786,366) (3,324,225) ----------- ----------- Total deferred tax liabilities.................. (6,564,240) (6,734,342) Net operating loss carryforwards.................. 6,450,977 14,198,845 Other............................................. 16,311 300,746 ----------- ----------- Total deferred tax assets....................... 6,467,288 14,499,591 Less valuation allowance.......................... -- 7,765,249 ----------- ----------- Net deferred tax assets......................... 6,467,288 6,734,342 ----------- ----------- Net deferred tax liabilities...................... $ (96,952) $ -- =========== ===========
The Company's NOL carryforwards expire as follows:
YEAR INCURRED AMOUNT EXPIRES ------------- ----------- ------- 1988.................................................. $ 1,091,000 2003 1989.................................................. 1,835,000 2004 1990.................................................. 2,908,000 2005 1991.................................................. 1,713,000 2006 1992.................................................. 1,292,000 2007 1993.................................................. 4,548,000 2008 1994.................................................. 4,757,000 2009 1995.................................................. 19,719,000 2010
Approximately $1,000,000 of the Company's net operating loss carryforward is subject to the "ownership change" rules of Section 382 of the Internal Revenue Code of 1986 and can only be utilized at the rate of approximately $500,000 per year. 9. RESTRICTED INVESTMENTS The terms of the Company's Senior Note agreement (see Note 5) required the Company to use a portion of the debt proceeds to purchase pledged securities (Restricted Investments) sufficient to provide for the payment of interest on the Senior Notes through June 1, 1998. The Company has purchased government securities whose maturity coincides with the interest repayment dates. F-19 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 9. RESTRICTED INVESTMENTS (CONTINUED) The Company's restricted investments at December 31, 1995 are summarized as follows:
GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------- ---------- ---------- ----------- U.S. Treasury Notes............ $49,723,016 $241,034 $-- $49,964,050 =========== ======== ==== ===========
The amortized cost and estimated fair value of the Company's restricted investments at December 31, 1995 by contractual maturity are summarized as follows:
AMORTIZED ESTIMATED MATURITIES COST FAIR VALUE ---------- ----------- ----------- Due within one year................................. $18,854,015 $18,980,942 Due after one year through five years............... 30,869,001 30,983,108 ----------- ----------- $49,723,016 $49,964,050 =========== ===========
10. EMPLOYEE BENEFIT PLAN The Company has established a 401(k) profit-sharing plan. Employees 21 years or older with one year of service are eligible to participate in the plan. Participants may elect to contribute, on a tax-deferred basis, up to 15% of their compensation, not to exceed $9,240 in 1995. The Company will match one- half of a participant's contribution, up to a maximum of 3% of the participant's compensation. The Company's matching contribution fully vests after five years of service. The Company's contributions to the plan were approximately $23,000, $58,000, and $85,000 in 1993, 1994, and 1995, respectively. 11. OPERATING LEASES The Company leases rights-of-way and cable conduit space, fiber optic cable, terminal facility space, and office space. The leases generally contain renewal options which range from one year to fifteen years, with certain rights-of-way and cable conduit space being renewable indefinitely after the minimum lease term subject to cancellation notice by either party to the lease. Lease payments in some cases may be adjusted for related revenues, increases in property taxes, operating costs of the lessor, and increases in the Consumer Price Index. Lease expense was $1,421,000, $908,000, and $1,466,000 for 1993, 1994, and 1995, respectively. Future minimum lease payments under noncancelable operating leases with original terms of more than one year as of December 31, 1995 are as follows:
RIGHTS-OF-WAY FIBER TERMINAL AND CABLE OPTIC FACILITY OFFICE CONDUIT SPACE CABLE SPACE SPACE TOTAL ------------- ---------- ---------- ---------- ----------- 1996............. $ 273,280 $ 375,340 $ 399,414 $1,628,659 $ 2,676,693 1997............. 273,280 291,168 345,056 1,515,859 2,425,363 1998............. 273,280 291,168 312,891 1,462,680 2,340,019 1999............. 273,280 120,791 257,398 1,380,860 2,032,329 2000............. 273,280 86,716 211,532 1,265,113 1,836,641 Thereafter....... 1,047,572 173,432 700,413 723,851 2,645,268 ---------- ---------- ---------- ---------- ----------- $2,413,972 $1,338,615 $2,226,704 $7,977,022 $13,956,313 ========== ========== ========== ========== ===========
F-20 INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. CONTINGENCIES On May 3, 1995, the Company asserted a claim for indemnification against the former shareholder of Phone One Inc. (the "Former Shareholder") for approximately $1 million on account of various breaches of representations and warranties made by the Former Shareholder to the Company in the agreement for the acquisition of Phone One Inc. (the "Phone One Acquisition Agreement"). The Former Shareholder has objected to the indemnification claim, which is subject to arbitration under the Phone One Acquisition Agreement. On July 27, 1995, the Company commenced an arbitration to recover $1,055,859 from the Former Shareholder. On October 9, 1995, the Former Shareholder filed an answer and counterclaims contesting the liability and claiming damages for alleged breach of contract, misrepresentation, interference with business relations, and violations of state and federal statutes and regulations. The Former Shareholder claims damages in excess of $2 million and attorneys' fees on the principal assertion that the Company fraudulently induced the Former Shareholder to consummate the Phone One Acquisition Agreement by failing to disclose its alleged intention not to honor its obligations under a related long distance services agreement. While the indemnification claims and the counterclaims are in their earliest stages, the Company, after consultation with counsel, believes that it has meritorious defenses to the counterclaims, which it will vigorously contest, and that its indemnification claims are meritorious. The Company is currently engaged in settlement negotiations with the Former Shareholder. The Company believes that in no event will the action have a material adverse impact on its financial condition, results of operations or cash flows. The Company is not a party to any other pending legal proceedings except for various claims and lawsuits arising in the normal course of business. The Company does not believe that these normal course of business claims or lawsuits will have a material effect on the Company's financial condition, results of operations or cash flows. 13. SUBSEQUENT EVENT On February 20, 1996, the Company entered into an agreement to purchase the telecommunications assets of EMI Communications Corp. (EMI) in exchange for 937,500 shares of the Company's common stock. Consummation of the acquisition is subject to receipt of federal and state regulatory and municipal approvals and certain other conditions. Management of the Company expects all of the conditions to consummation will be satisfied by September 30, 1996, but there can be no assurances. F-21 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Telecommunication Division of EMI Communications Corporation We have audited the accompanying balance sheets of Telecommunication Division of EMI Communications Corporation as of July 31, 1994 and 1995, and the related statements of operations and divisional equity and cash flows for each of the two years in the period ended July 31, 1995. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The Telecommunication Division is a part of EMI Communications Corporation and has no separate legal status or existence. Transactions with EMI Communications Corporation and its parent, Newhouse Broadcasting Corporation, are described in the notes to financial statements. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Telecommunication Division of EMI Communications Corporation at July 31, 1994 and 1995, and the results of its operations and its cash flows for each of the years then ended, in conformity with generally accepted accounting principles. Ernst & Young LLP Tampa, Florida March 8, 1996 F-22 TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION BALANCE SHEETS
JULY 31 ----------------------- JANUARY 31, 1994 1995 1996 ----------- ----------- ----------- (UNAUDITED) ASSETS Current assets: Accounts receivable (less allowance for doubtful accounts of $12,500 in 1994, 1995, and 1996, respectively)........... $ 3,737,927 $ 7,681,387 $ 8,238,646 Notes receivable and other assets........ 108,156 123,369 92,460 Prepaid expenses......................... 241,709 311,396 371,842 ----------- ----------- ----------- Total current assets................... 4,087,792 8,116,152 8,702,948 Property and equipment, net................ 13,522,348 11,282,436 10,040,740 Deposits, deferred charges and other as- sets...................................... 441,256 331,197 429,054 ----------- ----------- ----------- Total assets......................... $18,051,396 $19,729,785 $19,172,742 =========== =========== =========== LIABILITIES AND DIVISIONAL EQUITY Current liabilities: Accounts payable......................... $ 4,028,815 $ 4,875,071 $ 4,910,025 Federal transfer surcharge (Note 7)...... 3,497,500 4,556,700 4,556,700 Accrued compensation, employee benefits, pension, and related taxes.............. 367,892 355,501 175,795 Accrued sales and franchise tax.......... 91,092 609,845 1,058,264 Deferred revenue......................... 101,627 140,492 50,187 Other accrued liabilities................ 50,428 56,892 46,469 ----------- ----------- ----------- Total current liabilities.............. 8,137,354 10,594,501 10,797,440 Accrued pension and postretirement bene- fits...................................... 227,055 449,961 574,961 ----------- ----------- ----------- 8,364,409 11,044,462 11,372,401 Divisional equity.......................... 9,686,987 8,685,323 7,800,341 ----------- ----------- ----------- Total liabilities and divisional eq- uity................................ $18,051,396 $19,729,785 $19,172,742 =========== =========== ===========
See notes to financial statements. F-23 TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION STATEMENTS OF OPERATIONS AND DIVISIONAL EQUITY
SIX-MONTH PERIOD ENDED YEAR ENDED JULY 31 JANUARY 31 ------------------------ ------------------------ 1994 1995 1995 1996 ----------- ----------- ----------- ----------- (UNAUDITED) REVENUES Communication service.... $32,920,416 $35,643,585 $17,869,789 $21,026,461 Microwave service........ 4,186,791 4,127,504 1,907,994 2,113,098 Other.................... 205,756 250,775 110,558 118,264 ----------- ----------- ----------- ----------- 37,312,963 40,021,864 19,888,341 23,257,823 EXPENSES Facilities administration and maintenance costs... 35,602,603 36,082,066 18,218,031 22,072,370 Selling, general, and ad- ministrative............ 3,021,910 2,873,478 1,179,117 1,371,503 Depreciation and amorti- zation.................. 5,140,841 5,122,796 2,391,077 2,004,960 ----------- ----------- ----------- ----------- 43,765,354 44,078,340 21,788,225 25,448,833 ----------- ----------- ----------- ----------- Loss from operations....... (6,452,391) (4,056,476) (1,899,884) (2,191,010) Interest expense, net...... (937,807) (790,452) (387,354) (129,222) ----------- ----------- ----------- ----------- Loss before income taxes... (7,390,198) (4,846,928) (2,287,238) (2,320,232) Income tax benefit......... (2,711,889) (1,763,875) (832,928) (845,129) ----------- ----------- ----------- ----------- Net loss................... (4,678,309) (3,083,053) (1,454,310) (1,475,103) Divisional equity, begin- ning of year.............. 9,425,642 9,686,987 9,686,987 8,685,323 Distribution from parent... 4,939,654 2,081,389 1,540,701 590,121 ----------- ----------- ----------- ----------- Divisional equity, end of year...................... $ 9,686,987 $ 8,685,323 $ 9,773,378 $ 7,800,341 =========== =========== =========== ===========
See notes to financial statements. F-24 TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION STATEMENTS OF CASH FLOWS
SIX-MONTH PERIOD ENDED YEAR ENDED JULY 31 JANUARY 31 ------------------------ ------------------------ 1994 1995 1995 1996 ----------- ----------- ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES Net loss.................. $(4,678,309) $(3,083,053) $(1,454,310) $(1,475,103) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amorti- zation................. 5,140,841 5,122,796 2,391,077 2,004,960 Gain on sale of proper- ty, plant and equip- ment................... (12,221) (21,831) -- -- Changes in operating as- sets and liabilities: Accounts receivable... 194,768 (3,943,460) (749,721) (557,259) Notes receivable and other assets......... (66,629) (15,213) 1,526 30,909 Prepaid expenses...... (70,709) (69,687) (341,629) (60,446) Deposits, deferred charges and other as- sets................. (114,823) 7,228 (38,087) (148,857) Accounts payable and accrued liabilities.. (917,000) 1,359,082 (1,356,396) 293,244 Federal transfer sur- charge............... 1,147,700 1,059,200 566,200 -- Deferred revenue...... (47,067) 38,865 (21,430) (90,305) Accrued pension and post-retirement benefits............. 189,597 222,906 105,716 125,000 ----------- ----------- ----------- ----------- Net cash provided by (used in) operating activi- ties..................... 766,148 676,833 (897,054) 122,143 INVESTING ACTIVITIES Purchase of property and equipment................ (5,727,699) (2,795,123) (643,647) (712,264) Proceeds from sale of property and equipment... 21,897 36,901 -- -- ----------- ----------- ----------- ----------- Net cash used in investing activities............... (5,705,802) (2,758,222) (643,647) (712,264) FINANCING ACTIVITIES Distribution from Parent.. 4,939,654 2,081,389 1,540,701 590,121 ----------- ----------- ----------- ----------- Net cash provided by fi- nancing activities....... 4,939,654 2,081,389 1,540,701 590,121 ----------- ----------- ----------- ----------- Net increase (decrease) in cash and cash equiva- lents.................... -- -- -- -- Cash and cash equivalents, beginning of year........ -- -- -- -- ----------- ----------- ----------- ----------- Cash and cash equivalents, end of year.............. $ -- $ -- $ -- $ -- =========== =========== =========== ===========
See notes to financial statements. F-25 TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS (INFORMATION PERTAINING TO JANUARY 31, 1996 AND FOR THE SIX-MONTH PERIODS ENDED JANUARY 31, 1996 AND 1995 IS UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The Telecommunication Division of EMI Communications Corporation (the "Division") is a New York State based telecommunications company which operates a digital network, offering full-service telecommunications including systems engineering, interchange transmission facilities, end user communication services and network management. The Division generally services governmental entities, commercial end-users, as well as other corporations primarily in the Northeast United States and Canada. For the years ended July 31, 1994 and 1995 revenue of 70% and 67%, respectively, was derived from the Division's primary customer, State of New York's Office of General Services. In addition, for the years ended July 31, 1994 and 1995 74% and 75%, respectively, of accounts receivable were owed to the Division by this customer. The Division does not normally obtain collateral on accounts receivable. FINANCIAL STATEMENT PRESENTATION The financial statements include only those accounts related to the Division's operations after elimination of significant intercompany transactions. All other accounts of EMI Communications Corporation and its parent, Newhouse Broadcasting Corporation (collectively, the "Parent"), have not been included in the financial statements since they are not directly related to the Division's operations. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation is calculated over the estimated useful lives of the assets using the straight-line and accelerated methods for financial statement reporting and income tax purposes. INCOME TAXES The Division accounts for income taxes under the liability method as prescribed by Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that may be in effect when the differences are expected to reverse. Refer to Note 3. POSTRETIREMENT BENEFITS The Division accounts for postretirement benefits other than pensions in accordance with Financial Accounting Standards Board Statement No. 106 by accruing the estimated cost of retiree benefits other than pensions during the employees' active service period. The Division is recognizing the transition obligation over a 22-year period. Refer to Note 5. DEFERRED REVENUE Proceeds received from telecommunication customers in advance of services are deferred at the time of receipt and are included in revenues on a pro rata basis as the services are provided. F-26 TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) LONG LIVED ASSETS In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement No. 121 also addresses the accounting for long- lived assets that are expected to be disposed of. The Division will adopt Statement No. 121 for the fiscal year ending July 31, 1997 and, due to the significant amount of technical equipment maintained by the Division and the extensive number of estimates to be made to assess the financial impact of adoption of Statement No. 121, financial statement impact has not yet been determined. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. INTERCOMPANY ACCOUNTS All balance sheet related intercompany balances, which resulted from various transactions between the Division and its Parent, have been presented on a net basis and included in divisional equity. The balance is primarily the result of the Division's capitalization and participation in the Parent's central cash management program. INTERCOMPANY EXPENSE ALLOCATION The Parent provides various administrative services to the Division including legal assistance, cash management and management advisory services. It is the Parent's policy to charge these expenses and all other operating expense, on both a direct and indirect cost basis. These expenses (which are included in operating expenses) were $197,550 and $197,550 for the years ended July 31, 1994 and 1995, respectively. Interest charges have been allocated based on the assets employed. For the years ended July 31, 1994 and 1995 interest paid was $568,757 and $668,743, respectively. Management believes these allocation methods are reasonable. INTERIM FINANCIAL STATEMENTS The unaudited balance sheet at January 31, 1996 and the unaudited statements of operations and divisional equity and cash flows for the six-month periods ended January 31, 1995 and 1996 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. F-27 TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. PROPERTY AND EQUIPMENT Property and equipment and the related lives for depreciation purposes consisted of the following:
JULY 31 ------------------------ DEPRECIABLE 1994 1995 LIVES ----------- ----------- ----------- Land................................. $ 271,259 $ 271,259 Buildings and improvements........... 1,331,246 1,340,246 10-31 years Technical equipment.................. 43,905,095 46,352,865 5-7 years Other equipment, automobiles, furni- ture and fixtures................... 3,970,720 3,953,279 5-7 years ----------- ----------- 49,478,320 51,917,649 Less accumulated depreciation........ (37,050,275) (41,703,424) ----------- ----------- 12,428,045 10,214,225 Leasehold improvements, net of accumulated amortization of $810,242 and $860,206 at July 31, 1994 and 1995, respectively.................. 1,094,303 1,068,211 5-31 years ----------- ----------- $13,522,348 $11,282,436 =========== ===========
3. INCOME TAXES The Division's taxable income is included in the consolidated federal income tax return filed by the Parent. For financial reporting purposes the Division's income tax expense or benefit is computed on a separate company basis, with the resulting current income taxes payable or receivable and related deferred income taxes settled through the intercompany accounts. Accordingly, all balance sheet related income tax balances have been presented on a net basis and included in divisional equity. The income tax benefit differs from the amount computed by applying the federal statutory rate to loss before income taxes. The difference is reconciled as follows:
YEAR ENDED JULY 31 ------------------------ 1994 1995 ----------- ----------- Loss before income taxes......................... $(7,390,198) $(4,846,928) Federal statutory rate........................... 35% 35% ----------- ----------- (2,586,569) (1,696,425) State and local income taxes, net of federal tax effect.......................................... (132,872) (86,317) Other............................................ 7,552 18,867 ----------- ----------- Benefit based on loss............................ $(2,711,889) $(1,763,875) =========== ===========
Deferred income taxes arise principally from differences between financial reporting and income tax reporting of the federal transfer surcharge, accrued postretirement and pension benefits, asset valuation allowances and accrued expenses. 4. PENSION PLAN The Division participates in a Parent-sponsored noncontributory pension plan which covers substantially all employees. The plan provides participating employees with retirement benefits in accordance with benefit provision formulas which are based on years of service and career pay. The Division's funding policy is to contribute amounts to the plan sufficient to meet the minimum funding requirements set forth in the Employee F-28 TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 4. PENSION PLAN--(CONTINUED) Retirement Income Security Act of 1974, plus additional amounts as the Division may determine to be appropriate from time to time. A summary of the components of net periodic pension costs is presented below:
YEAR ENDED JULY 31 ------------------- 1994 1995 -------- --------- Service cost-benefits earned during the period........ $119,689 $ 110,981 Interest cost on projected benefit obligation......... 117,086 127,169 Actual return on plan assets.......................... (20,672) (198,111) Net amortization and deferral......................... (62,598) 90,725 -------- --------- Net periodic pension cost............................. $153,505 $ 130,764 ======== =========
Actuarial assumptions used to determine pension costs include a discount rate of 8.5%, expected long-term rate of return on assets of 9.5%, and expected rate of increase in future compensation of 5% for all periods shown. A summary of the Plan's funded status and amounts recognized in the Division's balance sheets is as follows:
JULY 31 ------------------------ 1994 1995 ----------- ----------- Actuarial present value of accumulated benefit obligations: Vested...................................... $(1,186,458) $(1,330,453) Nonvested................................... (43,423) (49,642) ----------- ----------- (1,229,881) (1,380,095) Projected compensation increases.............. (309,397) (327,406) ----------- ----------- Projected benefit obligations................. (1,539,278) (1,707,501) Plan assets at market value................... 1,156,268 1,400,566 ----------- ----------- Projected benefit obligations in excess of plan assets.................................. (383,010) (306,935) Unrecognized net transition obligation........ 57,348 50,975 Unrecognized net loss......................... 190,795 104,322 ----------- ----------- Pension liability recognized in the balance sheets....................................... $ (134,867) $ (151,638) =========== ===========
The components of the pension liability recognized in the balance sheets are as follows:
JULY 31 -------------------- 1994 1995 --------- --------- Current.............................................. $ (58,599) $ (52,745) Long-term............................................ (76,268) (98,893) --------- --------- $(134,867) $(151,638) ========= =========
The Plan's assets at July 31, 1994 and 1995 were primarily invested in fixed income securities, equities and short-term securities. F-29 TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 4. PENSION PLAN--(CONTINUED) In addition to the defined benefit pension plan as described above, the Division also participates in a defined contribution 401(k) plan covering substantially all employees. Provisions of the plan allow employees to contribute a portion of their salary or wages as prescribed under Section 401(k) of the Internal Revenue Code. The Division provides an employer contribution based on a percentage of the employee's contribution. The employer's contribution was $37,016 and $48,999 for the years ended July 31, 1994 and 1995, respectively. 5. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Division participates in a Parent-sponsored postretirement health care and life insurance plan to retirees and eligible dependents. These benefits are funded as incurred from the general assets of the Division. Prior to July 31, 1993, the cost of retiree health care and life insurance benefits was charged to expense as premiums were paid (pay-as-you-go-basis). Effective August 1, 1993, the Division adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This Statement requires that the cost of postretirement benefits be accrued during an employee's active working career instead of recognizing this cost on the cash basis. In accordance with Statement No. 106, the transition obligation, representing the unrecognized accumulated past-service benefit obligation for all plan participants, may be recognized as a cumulative effect of an accounting change or may be amortized on a straight-line basis over the average remaining service period of active plan participants. The Division has elected to amortize the $783,450 of transitional obligation on a straight-line basis over 22 years. For the years ended July 31, 1994 and 1995, the adoption of the statement resulted in an increase in postretirement benefit cost of $150,787 and $200,281, respectively. A summary of the components of net periodic other postretirement benefit costs relating to the Plan is as follows:
YEAR ENDED JULY 31 ------------------- 1994 1995 --------- --------- Service cost--benefits earned during the year......... $ 62,305 $ 82,538 Interest cost on projected benefit obligation......... 62,299 88,144 Net amortization and deferral......................... 35,611 37,430 --------- --------- Net postretirement benefit cost....................... $ 160,215 $ 208,112 ========= =========
Actuarial assumptions used to determine the liability for the postretirement benefits other than pensions included the assumed weighted average discount rate used in determining the actuarial present value of the accumulated postretirement benefit obligation of 8.5% and the assumed weighted average rate of increase in future compensation levels related to pay-related life insurance benefits of 5.0% for all periods shown. The future health care cost trend rate for the year ended July 31, 1995 was approximately 14% and is assumed to decrease to 7% by the year 2006 and remain at that approximate level thereafter. The health care trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rate by one percentage point would increase the accumulated postretirement benefit obligations by $299,627 and increase the aggregate of the service and interest cost components of the net postretirement benefit costs by $57,070 for the year ended July 31, 1995. The Division has not prefunded any of its postretirement health and life insurance liabilities, and consequently, there are no expected returns on assets anticipated in the calculation of expense. F-30 TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS--(CONTINUED) A schedule reconciling the accumulated benefit obligation with the Division's recorded liability follows:
JULY 31 ---------------------- 1994 1995 --------- ----------- Accumulated postretirement benefit obligation: Retirees....................................... $(112,698) $ (124,637) Fully eligible active participants............. (173,328) (217,276) Other active participants...................... (515,843) (861,851) --------- ----------- Accumulated postretirement benefit obligation.... (801,869) (1,203,764) Unrecognized net loss (gain)..................... (96,757) 140,469 Unrecognized transition obligation............... 747,839 712,227 --------- ----------- Accrued noncurrent postretirement benefit recognized in the balance sheets................ $(150,787) $ (351,068) ========= ===========
6. COMMITMENTS AND CONTINGENCIES At July 31, 1994 and 1995, the Division has issued letters of credit amounting to $6,023,000 and $5,780,000, respectively, related to performance guarantees on contracts with a customer and a vendor. The Division is obligated under long-term leases expiring at various dates through 2008. Certain leases contain renewal options. The leases generally provide that the Division shall pay adjustments for property taxes, insurance, utilities, and other related charges. Future minimum lease payments under noncancelable operating leases as of July 31, 1995 are as follows:
YEAR AMOUNT ---- ----------- 1996........................................................... $ 2,849,928 1997........................................................... 2,329,665 1998........................................................... 2,062,885 1999........................................................... 1,640,367 2000........................................................... 866,387 Thereafter..................................................... 981,529 ----------- $10,730,761 ===========
Rent expense under these leases totaled $2,557,546 and $2,371,905 for the years ended July 31, 1994 and 1995, respectively. F-31 TELECOMMUNICATION DIVISION OF EMI COMMUNICATIONS CORPORATION NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 6. COMMITMENTS AND CONTINGENCIES--(CONTINUED) Aggregate future minimum rentals to be received under noncancelable subleases, expiring on various dates through 2008, are as follows:
YEAR AMOUNT ---- ---------- 1996............................................................ $ 744,704 1997............................................................ 534,587 1998............................................................ 424,337 1999............................................................ 332,719 2000............................................................ 176,417 Thereafter...................................................... 151,925 ---------- $2,364,689 ==========
7. FEDERAL TRANSFER SURCHARGE During March 1995, the State of New York's Office of General Services ("OGS") contested the billing of certain Federal Transfer Surcharges from January 1, 1991 through February 1995. The Division negotiated with OGS and on December 14, 1995 a settlement was reached for the disputed surcharges. Included in operations for the years ended July 31, 1994 and 1995 is $1,147,700 and $1,059,200, respectively, including interest charges of $137,000 and $127,000, respectively, in connection with this settlement. No further charges to operations for this settlement are expected and the settlement is expected to be paid beginning in April 1996. 8. SUBSEQUENT EVENT On February 20, 1996, the Parent entered into an agreement to sell the property and equipment of the Division, as well as assign customer lists, certain contracts and leases, to Intermedia Communications of Florida, Inc. (ICI) for 937,500 shares of ICI common stock. Consummation of the transaction is subject to receipt of certain regulatory approvals and certain other conditions. F-32 APPENDIX A TO PROSPECTUS GLOSSARY Access charges--The charges paid by long distance carriers to the local telephone companies for accessing the local networks of the local telephone companies to originate and terminate long distance calls. ATM (Asynchronous Transfer Mode)--An information transfer standard that is one of a general class of packet technologies that relay traffic by way of an address contained within the first five bytes of a standard fifty-three byte- long packet or cell. The ATM format can be used by many different information systems, including LANs, to deliver traffic at varying rates, permitting a mix of data, voice and video. Bandwidth--The range of frequencies that can be passed through a medium, such as glass fibers, without distortion. The greater the bandwidth, the greater the information-carrying capacity of such medium. For fiber optic transmission, electronic transmitting devices determine the bandwidth, not the fibers themselves. CAP (Competitive Access Provider)--A company that provides its customers with an alternative to the local telephone company for local transport of private line, special access and transport of switched access telecommunications services. CAPs are also referred to in the industry as alternative local telecommunications service providers (ALTS) and metropolitan area network providers (MANs) and were formerly referred to as alternative access vendors (AAVs). Central office--The switching center or central switching facility of a local telephone company. CENTREX--Central office based alternative for a private business exchange. Dark fiber--Refers to fiber optic cables absent the electronic components that transmit telecommunications traffic through such cables. Dedicated--Refers to telecommunications lines dedicated to or reserved for use by particular customers along predetermined routes (in contrast to telecommunications lines within the local telephone company's public switched network). Digital--Describes a method of storing, processing and transmitting information through the use of distinct electronic or optical pulses that represent the binary digits 0 and 1. Digital transmission and switching technologies employ a sequence of these pulses to represent information, as opposed to the continuously variable analog signal. Diverse routing--Describes a telecommunications facility where the telecommunications signals are transported simultaneously in two different directions (either over the same cable or over different cables) so that, if the cable is cut, the traffic can continue without interruption to its destination. ICI's networks, like the networks of many carriers, provide diverse routing by virtue of their ring-like architecture, which permits traffic to be transported simultaneously to its destination in opposite directions along the ring. Enhanced network services--Telecommunications services providing digital connectivity, primarily for data applications, via frame relay, ATM, or digital interexchange private line facilities. Enhanced network services also include applications on such networks, including Internet access and other Internet services. FCC--Federal Communications Commission. Fiber mile--Refers to the number of route miles along a telecommunications path multiplied by the number of fibers along that path. See the definition of "route mile" below. Frame relay--A wide area transport technology that organizes data into units called frames instead of providing fixed bandwidth as with private lines. A-1 Hubs--Collection centers located centrally in an area where telecommunications traffic can be aggregated at a central point for transport and distribution. Interconnection Decisions--Rulings by the FCC announced in September 1992, August 1993 and July 1994 which require the RBOCs and most other LECs to provide interconnection in LEC central offices to any CAP, long distance carrier or end user seeking such interconnection for the provision of interstate special access and switched access transport services. Interexchange Services--Often called long distance services, these are telecommunications services all offered through circuit switched network devices. Interexchange Services include outbound and inbound calling services, calling card and related features. Interoperability--The ability of systems to interact in a seamless fashion. IXC (IntereXchange Carrier)--A long distance carrier providing services between local exchanges on an intrastate or interstate basis. A long distance carrier may also be a long distance resale company. LAN (Local Area Network)--Refers to the interconnection of computers for the purpose of sharing files, programs and printers. LANs may include dedicated computers or file servers that provide a centralized source of shared files and programs. LATA--Refers to a Local Access and Transport Area. A geographic area (one of 161 in the United States) established at the time AT&T divested the regional Bell operating companies. LECs and competitive local exchange carriers (CLECs) are authorized as the carriers of telecommunications within a LATA. IXCs typically carry telecommunications traffic between or among LATAs. Regulations vary from state to state. LEC (Local Exchange Carrier)--A company providing local telephone services. Local exchange--A geographic area determined by the appropriate state regulatory authority in which calls generally are transmitted without toll charges to the calling or called party. Local Exchange Services--Switched telecommunications services that connect telephone users to each other, within the metropolitan area. These services include "local dial tone" services such as business lines, CENTREX services and related features and switched access to IXC networks. Local Network Services--Telecommunications services provided within a metropolitan area. These services include local exchange, switched and special access, and local private line services. Node--An individual point of origination or termination of data on the ICI enhanced data network. POP (Point Of Presence)--Locations where a carrier has installed transmission equipment in a service area that serves as, or relays calls to, a network switching center of that carrier. Private line--Refers to a dedicated telecommunications connection between different locations. RBOC--Regional Bell operating company. Redundant electronics--Describes a telecommunications facility using two separate electronic devices to transmit the telecommunications signal so that if one device malfunctions, the signal may continue without interruption. ICI's networks typically use redundant electronics. Route mile--A geographical measure defined as one physical mile of fiber optic cable, regardless of the number of telecommunications paths within that cable. See the definition of "fiber mile" above. SONET (Synchronous Optical NETwork)--A family of fiber optic transmission rates created to provide the flexibility needed to transport many digital signals with different capacities, and to provide a design standard for manufacturers. A-2 Special access services--Refers to a private, dedicated telecommunications lines or "circuits" along the network of a local telephone company or alternative local exchange carrier (such as ICI), which line or circuit runs to or from the POPs of long distance carriers. Examples of special access services are telecommunications lines running between POPs of a single long distance carrier, from one long distance carrier's POPs to the POPs of another long distance carrier, or from the business or government customer to its long distance carrier's POPs. Special access services do not require the use of switches. Switch--Refers to, in modern telephony, an electronic device that selects and connects circuits together to create a path for a telecommunications transaction. These devices are available to handle voice and data. Switched access services--Refers to transportation of switched traffic along dedicated lines between a local exchange providers' central offices and a long distance carriers' POPs. Switched local services--Refers to local "dial tone" services such as those offered by the LECs. These services are now becoming open to competition in many states. Switched traffic--Refers to telecommunications traffic that traverse any switched network (i.e., not on dedicated lines). This traffic is switched at a carrier's facility. Systems integration--Refers to a professional service comprised of consulting, engineering, furnishing, installing, and/or maintaining various hardware and software systems for a particular customer purpose. VSAT (Very Small Aperture Terminal)--Refers to a means of transporting and delivering data via satellite transmission. A-3 [DIAGRAM OF ICI INTEGRATED SERVICES] ================================================================================ NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMA- TION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFER OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPA- NY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THOSE TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF ANY OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHO- RIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALI- FIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUN- DER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE IN- FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. --------------- TABLE OF CONTENTS
PAGE ---- Available Information.................................................... 4 Incorporation of Certain Documents by Reference.......................... 4 Prospectus Summary....................................................... 5 Risk Factors............................................................. 13 Use of Proceeds.......................................................... 18 Price Range of Common Stock.............................................. 19 Dividend Policy.......................................................... 19 Dilution................................................................. 19 Capitalization........................................................... 20 Selected Financial and Other Operating Data.............................. 21 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 23 Business................................................................. 30 Management............................................................... 48 The Selling Stockholders................................................. 51 Description of Capital Stock............................................. 52 Underwriting............................................................. 55 Legal Matters............................................................ 56 Experts.................................................................. 56 Index to Financial Statements............................................ F-1 Glossary................................................................. A-1
================================================================================ ================================================================================ [LOGO OF INTERMEDIA COMMUNICATIONS APPEARS HERE] INTERMEDIA COMMUNICATIONS OF FLORIDA, INC. 4,496,689 SHARES OF COMMON STOCK --------------- PROSPECTUS --------------- BEAR, STEARNS & CO. INC. MERRILL LYNCH & CO. MORGAN STANLEY & CO. INCORPORATED May 8, 1996 ================================================================================ -----END PRIVACY-ENHANCED MESSAGE-----